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
September 30, 2022
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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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(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 November 14,
2022
was
13,298,546.23
.
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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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Consolidated Financial Statements
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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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Item
2.
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27
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Item
3.
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38
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Item
4.
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38
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PART II.
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OTHER INFORMATION
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Item
1.
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39
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Item
1
A.
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39
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Item
2.
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39
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Item
3.
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39
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Item
4.
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39
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Item
5.
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39
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Item
6.
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40
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41
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Part I. FINANCIAL INFORMATION
| Item 1. |
Consolidated Financial Statements
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MacKenzie Realty Capital, Inc.
Consolidated
Balance Sheets
| September 30, 2022 | June 30, 2022 | |||||||
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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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$ |
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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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Investment acquisition advance
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Prepaid expenses and other assets
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Assets held for sale, net
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Total assets
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$
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$ |
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Liabilities
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Mortgage notes payable, net
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$
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$ |
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Notes payable
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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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Stock redemption payable
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Below-market lease liabilities, net
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| Due to related entities |
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Contingent liability
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Capital pending acceptance
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Liabilities held for sale
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Total liabilities
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Equity
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Common stock, $
issued and outstanding as of September 30, 2022 and June 30, 2022, respectively.
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Preferred stock, $
and outstanding as of September 30, 2022 and June 30, 2022, respectively.
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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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Total equity
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Total liabilities and equity
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$
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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 September 30,
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| 2022 | 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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Interest expense
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Depreciation and amortization
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Asset management fees to related party (Note 7)
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Professional fees
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Administrative cost reimbursements to related party (Note 7)
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General and administrative
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Directors’ fees
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Transfer agent cost reimbursements to related party (Note 7)
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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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| 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 income attributable to non-controlling interests
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(
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(
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Net income attributable to preferred stockholders
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(
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| Net income attributable to common stockholders |
$
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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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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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Common Stock
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Preferred Stock
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Total | |||||||||||||||||||||||||||||||||
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Three Months Ended
September 30, 2022
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Number of
Shares
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Par
Value
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Number of
Shares
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Par
Value
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Additional Paid-
in Capital
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Accumulated Deficit
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Stockholders’
Equity
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Non-controlling
Interests
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Total Equity
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|||||||||||||||||||||||||||
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Balance, June 30,
2022
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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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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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Operating Partnership Preferred Units issued
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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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Dividends to preferred 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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Net income
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-
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- |
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Operating Partnership Class A conversion to common stock
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* |
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(
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Issuance of preferred stock
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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 through reinvestment of dividends
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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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Redemptions 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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Balance,
September 30, 2022
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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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*
Amount is less than $1.
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Three Months Ended September 30, 2021
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Number of
Shares
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Par
Value
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Additional Paid-
in Capital
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Accumulated
Deficit
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Total
Stockholders’
Equity
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Non-controlling
Interests
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Total Equity
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|||||||||||||||||||||
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Balance, June 30,
2021
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$
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$
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$
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(
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$
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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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Dividends to 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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Net income
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-
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Issuance of common stock through reinvestment of dividends
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Balance,
September 30
,
2021
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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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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 September 30
,
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2022
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2021
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Cash flows from operating activities:
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Net income
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$
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$
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Adjustments to reconcile net income to net cash from operating activities:
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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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(
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(
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Net realized gain on investments
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(
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(
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Straight - line rent
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(
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(
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Depreciation and amortization
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Amortization of deferred financing costs
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Accretion of market lease and other intangibles, net
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(
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(
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Changes in assets and liabilities:
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Investments income, rent and other receivables
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(
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Prepaid expenses and other assets
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(
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(
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Deferred rent and other liabilities
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Accounts payable and accrued liabilities
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(
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(
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Due to related entities
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(
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Net cash from operating activities
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(
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Cash flows from investing activities:
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Proceeds from sale of investments
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Investment acquisition advance
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(
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(
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Investments in real estate assets
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(
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(
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Purchase of investments
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(
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(
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Return of capital distributions
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Payment on contingent liability
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(
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Net cash from investing activities
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Cash flows from financing activities:
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Payments on mortgage notes payable
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(
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(
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Payments on notes payable
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(
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Dividend to stockholders
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(
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(
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Proceeds from issuance of preferred stock
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Payment of selling commissions and fees
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(
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Distributions to non-controlling interests holders
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(
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(
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Redemption of common stock
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(
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Capital pending acceptance
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Net cash from financing activities
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(
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Net increase in cash and restricted cash
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Cash and restricted cash at beginning of the period
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Cash and restricted cash at end of the period
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$
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$
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Cash at end of the period
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$
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$
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Restricted cash at end of the period
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Cash and restricted cash at end of the period classified as assets held for sale
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Total cash, restricted cash and cash classified as held for sale at end of the period
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$
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$
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Supplemental disclosure of non-cash financing activities and other cash flow information
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Issuance of the Operating Partnership
Preferred units for the purchase of First & Main, LP (Note 1)
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$
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$
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Fair value of assets acquired from
consolidation of First & Main, LP
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$
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$
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Fair value of liablities assumed from
consolidation of First & Main, LP
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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 through reinvestment of dividends
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$
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$
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Cash paid for interest
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$
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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.
September 30, 2022
(Unaudited)
NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION
MacKenzie Realty Capital, Inc. (the “Parent Company”
together with its subsidiaries as discussed below, the “Company
,” “we,” “us,” or “our
”
) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. We were 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”). We withdrew our election to be treated as a BDC on December 31, 2020. We have 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”). We are 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.
We commenced our operations on February 28, 2013, and our fiscal year-end
is June 30.
We filed our 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 our common stock. The initial public offering
commenced in January 2014 and concluded in October 2016. We filed a second registration statement with the SEC to register a subsequent public offering of
15,000,000
shares of our common stock. The second offering commenced in December 2016 and concluded on October 28, 2019. We filed a third registration statement with the SEC to register a public offering of
15,000,000
shares of our 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 our outstanding common stock
authorized our Board of Directors to withdraw our election to be regulated as a BDC under the 1940 Act. The withdrawal was effective with the SEC on December 31, 2020, when we 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, we formed an operating partnership, MacKenzie Realty Operating
Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and operating real estate assets. As of September 30, 2022, we own all limited partnership units of the Operating Partnership except for
89,552.61
Class A Limited Partnership units and
327,172.32
preferred units, which would be entitled to receive, at liquidation of the Operating Partnership,
89,552.61
common shares of the Company
(stated value of $
10.25
per share) and $
8,179,308.00
(stated value of $
25
per share) in liquidation preference, respectively, which are approximately
13.05
% of the Operating Partnership’s total capital outstanding.
In March 2021, we, together with our 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. We own
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. We are the controlling majority owner of both companies; therefore,
effective March 31, 2021, we have consolidated the financial statements of these companies.
On April 13, 2021, we filed a preliminary offering circular (the “Offering Circular”) pursuant to Regulation A with the SEC to sell up to $
50,000,000
of shares of our 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.
On October 4, 2021, through the Operating Partnership, we acquired a
90
% economic interest in Hollywood Hillview, a Delaware limited liability company, to acquire and operate a multifamily building located in Los Angeles,
California. 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”). We are the controlling majority owner of
Hollywood Hillview; therefore, effective December 31, 2021, we have consolidated the financial statements of Hollywood Hillview.
On January 25, 2022, through the Operating Partnership, we acquired a
98
% limited liability company interest in MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”), formed to acquire, renovate, and own the 84-unit
multifamily building located at 1841 Laguna Street, Concord, CA. The joint venture partners own the remaining
2
% of the limited
liability company interest as well as a carried interest. We are the controlling majority owner of the MacKenzie Shoreline; therefore, effective June 30, 2022, we have consolidated the financial statements of MacKenzie Shoreline.
On April 1, 2022, we, and our newly formed, wholly owned subsidiary, FSP Merger Sub,
Inc. (“Merger Sub”) entered into a reverse triangular merger agreement with FSP Satellite Place Corp. (“FSP Satellite”), pursuant to which the Merger Sub would be merged with and into FSP Satellite with FSP Satellite as the surviving entity, but
renamed MacKenzie Satellite Place Corp. (“MacKenzie Satellite”). On June 1, 2022, the merger closed, and MacKenzie Satellite became a wholly owned subsidiary of us, which in turn owns the Satellite Place building, a six-story Class “A” suburban
office building containing approximately
134,785
rentable square feet of space located on approximately
10
acres of land in Duluth, GA. The former shareholders of FSP Satellite received cash or shares of the Company, based upon their election. All former
shareholders of FSP Satellite holders elected to be paid in cash with the exception of
two
shareholders who elected to receive common
and preferred stocks in the amount of $
27,503
and $
13,752
, respectively. Subsequent to the completion of the merger, we have consolidated the financial statements of MacKenzie Satellite effective June 30, 2022.
On May 6, 2022, the Operating Partnership purchased
100
% of the membership interests in
eight
limited liability companies (“Management Companies”) and
one
parcel of entitled land from The Wiseman Company, LLC (“Wiseman”) for $
18,333,000
and $
3,050,000
, respectively.
The limited liability companies own the general partnership interests in
eight
limited partnerships, each of which own a Class A or B
office property in Napa, Fairfield, or Woodland, California (the “Wiseman Properties”). Each Management Company is the sole general partner of each of the limited partnerships. The membership interest purchase price is subject to adjustments and
holdbacks as provided in the membership interest purchase agreement. As part of the purchase agreement, $
4,650,000
of the purchase price
was paid through the issuance of
206,666.67
Preferred Units of the Operating Partnership and $
750,000
of the land purchase price was paid through the issuance of
77,881.62
Class A units of the Operating Partnership. Further details of this acquisition are discussed in Note 5. We have consolidated the financial statements of the
eight
limited liability companies, which hold the general partnership interests in the limited partnerships, effective June 30, 2022.
Wiseman is a full-service real estate syndicator, developer, broker, and property
manager. It was founded in 1979 and served as the general partner for
nine
currently active partnerships owning the Wiseman Properties.
Concurrently with acquiring the general partnership interests in the Wiseman Properties, the Operating Partnership also negotiated the right to acquire the limited partnership interest in each Wiseman Property at pre-determined prices over the
following
two years
. Management believes this transaction is strategically important as it focuses the portfolio on our desired
geographic area (Western United States) and creates a captive pipeline of properties which we can acquire when convenient over the next
two years
.
On July 29, 2022, in addition to the general partnership interest in First & Main, LP (“First & Main”), the Operating Partnership completed the acquisition of
100
% of the limited partnership interest in First & Main for total purchase price of $
3,376,322
, of
which $
2,711,378
was paid through issuance of
120,505.66
Preferred Units of the Operating Partnership. After the acquisition of the limited partnership interest, we consolidated the financial statements of First & Main during the quarter ended September
30, 2022.
We are externally managed by MacKenzie Capital Management, LP (“MacKenzie”) under
the administration agreement dated and effective as of February 28, 2013 (the “Administration Agreement”). MacKenzie manages all of our affairs except for providing investment advice. MCM Advisers, LP (the “Investment Adviser”) advises us in our
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 us in our assessment, acquisition, and divestiture of real estate assets. We pursue 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
September 30, 2022, we have raised approximately $
147.42
million, including proceeds from our dividend reinvestment plan (“DRIP”) of
approximately $
12.94
million. Of the shares issued by us in exchange for the total capital raised as of September 30, 2022,
approximately $
12.03
million worth of shares have been repurchased under our share repurchase program. We have raised $
7.99
million pursuant to the Offering Circular as of September 30, 2022.
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. We follow the accounting principles generally accepted in the United States of America (“GAAP”) and
includes the accounts of our wholly owned consolidated subsidiaries and majority-owned controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The unaudited
consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of our 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, 2022, included in our annual report on Form 10-K filed with the SEC.
Certain prior period information has been reclassified to conform to the prior year end presentation. The reclassification
has no effect on our consolidated balance sheet or the consolidated statement of operations as previously reported.
There
have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2022, 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.
Cash and Restricted Cash
Our 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 us 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. We consider
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. We monitor and adjust our receivables, and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. We have determined that all investments income receivable balances outstanding
as of September 30, 2022 and June 30, 2022, are collectible and do not require recording any uncollectible allowance.
Rents and Other Receivables
We 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. We exercise
judgment in establishing these allowances and considers payment history and current credit status of tenants in developing these estimates. We have determined that all rent receivable balances outstanding as of September 30, 2022 and June 30,
2022, are collectible and do not require recording any uncollectible allowance.
Capital Pending Acceptance
We conduct closings for new purchases of our common stock
twice per month and admits new stockholders effective beginning the first of each month. Subscriptions are effective only upon our 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 balance sheets. As of September 30, 2022 and June 30, 2022, capital pending acceptance was $
235,000
and $
85,000
, respectively.
Income Taxes and Deferred Tax Liability
The Parent Company has elected to be treated as a REIT
for tax purposes under the Code and as a REIT, 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, 2021. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2021. Similarly, for the tax year
2022, 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 2022.
TRS, MacKenzie NY
2
and MacKenzie Satellite are subject to corporate federal and state income tax on their taxable income at regular statutory rates. However, as of
September 30, 2022, they did
no
t have any taxable income for tax years 2021 or 2022. Therefore, TRS, MacKenzie NY 2 and
MacKenzie Satellite did
no
t record any income tax provisions during any fiscal period within the tax year 2021 and 2022.
The Operating Partnership is a limited partnership and
its subsidiaries; Addison Property Owner, LLC (the “Addison Property Owner”), Hollywood Hillview Owner, LLC (“Hollywood Hillview”), MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”) and First & Main, LP (“First & Main”) 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, we consider 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
September 30, 2022 and June 30, 2022, there were
no
uncertain tax positions. Management’s determinations regarding ASC 740 are
subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
Subsequent Events
Subsequent events are events or transactions that occur
after the date of the consolidated statements of assets and liabilities but before the date the consolidated financial statements are available to be issued. Subsequent events that provide additional evidence about conditions that existed at
the date of the consolidated statements of assets and liabilities are considered in the preparation of the consolidated financial statements presented herein. Subsequent events that occur after the date of the consolidated statements of assets
and liabilities that do not provide evidence about the conditions that existed as of the date of the consolidated statements of net assets are considered for disclosure based upon their significance in relation to our consolidated financial
statements taken as a whole.
Fair Value of
Financial Instruments
Fair value
estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. We
believe that the carrying amounts of our financial instruments, consisting of cash, restricted cash, investments income, rent and other receivables, prepaid expenses and other assets, mortgage notes payable, accounts payable and accrued
liabilities, below-market lease liabilities, net, deferred rent and other liabilities and due to related entities, approximate the fair values of such items based on their nature, terms, and interest rates.
Equity Securities
We have minority and non-controlling equity investments
in various limited partnerships and non-traded entities, which do not have readily determinable fair values. We do 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
We 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 our 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 sheets as of September 30, 2022 and June 30, 2022:
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
September 30, 2022
|
||||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
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
|
|
%
|
|
|||||||
|
1300 Main, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Green Valley Medical Center, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Main Street West, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Martin Plaza Associates, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
One Harbor Center, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Westside Professional Center I, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Woodland Corporate Center II, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Total
|
$
|
|
||||||||||
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
June 30, 2022
|
||||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
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
|
|
%
|
|
|||||||
|
1300 Main, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
First & Main, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Green Valley Medical Center, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Main Street West, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Martin Plaza Associates, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
One Harbor Center, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Westside Professional Center I, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Woodland Corporate Center II, LP
|
Limited Partnership
|
GP Interest
|
|
% | * |
|
||||||
|
Total
|
$
|
|
||||||||||
*
Represents
1
% general partner interests in the partnerships, which are also entitled to profit sharing distributions ranging from
25
% to
50
%.
These are equity method investments that do not meet the
consolidation requirements under ASC 810. Under the 1940 Act, these investments are considered “voting securities” as opposed to “investment securities”. Therefore, we listed these equity method investments separately from rest of the equity
method investments at fair value in the consolidated balance sheets. As of September 30, 2022, our investments in 1300 Main, LP, Dimensions 28, LLP, Green Valley Medical Center, LP, Main Street West, LP, Martin Plaza Associates, LP, One Harbor
Center, LP, Westside Professional Center I, LP and Woodland Corporate Center II, LP are considered to be voting securities under the 1940 Act. As of June 30, 2022, our investments in 1300 Main, LP, First & Main, LP, Dimensions 28, LLP,
Green Valley Medical Center, LP, Main Street West, LP, Martin Plaza Associates, LP, One Harbor Center, LP, Westside Professional Center I, LP and Woodland Corporate Center II, LP were considered to be voting securities under the 1940 Act.
Therefore, these investments were shown as unconsolidated investments (non-security), at fair value in the consolidated balance sheets. For GAAP purposes, these investments have been recorded under the equity method investments, for which we
have elected the fair value option as discussed above.
Contingent Consideration in an Asset Acquisition
Contingent consideration recognized is
included in the initial cost of the assets acquired. Subsequent changes in the recorded amount of contingent consideration will generally be recognized as an adjustment to the cost basis of the acquired assets, in accordance with ASC
323-10-35-14a and ASC 360-10-30-1. The subsequent changes will be allocated to the acquired assets based on their relative fair value at the date of acquisition.
Subsequent change in contingent
consideration impacts the cost basis of acquired assets, which may also impact the income statement through subsequent accounting for the acquired asset. We are aware of diversity in practice regarding the subsequent treatment of the income
statement effect of changes to the cost basis of the acquired assets. We generally believe the depreciation or amortization of these assets should be recognized as a cumulative “catch up” adjustment, as if the additional amount of
consideration that is no longer contingent had been accrued from the outset of the arrangement.
Impairment of Real Estate Assets
We continually monitor events and changes in
circumstances that could indicate that the carrying value of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment emerge, we assess whether we will recover the carrying value of the asset
through our undiscounted future cash flows and our eventual disposition. Based on this assessment, if we do not believe that it will recover the carrying value of the real estate and related intangible assets, we 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 on assets held for use were recorded for the period ended September 30, 2022. Impairment charges on held for sale are discussed in Note 5.
Reportable Segments
ASC 280, Segment Reporting, establishes standards for
reporting financial and descriptive information about an enterprise’s reportable segments. We have
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 we evaluate operating performance on an overall
portfolio level.
NOTE 3 – INVESTMENTS IN REAL ESTATE
The following
tables provide summary information regarding our operating properties which are owned through our subsidiaries:
Consolidated
Operating Properties
|
Property Name:
|
|
|
|
|
||||
|
Property Owner:
|
|
|
|
|
||||
|
Location:
|
|
|
|
|
||||
|
Number of Tenants:
|
|
|
|
|
||||
|
Year Built:
|
|
|
|
|
||||
|
Ownership Interest:
|
|
|
|
|
||||
|
|
||||||||
|
Property Name:
|
|
|
|
|
||||
|
Property Owner:
|
|
|
|
|
||||
|
Location:
|
|
|
|
|
||||
|
Number of Tenants:
|
|
|
|
|
||||
|
Year Built:
|
|
|
|
|
||||
|
Ownership Interest:
|
|
|
|
|
The following table presents the allocation of real
estate assets acquired during the three months ended September 30, 2022 based on asset acquisition accounting.
|
Property Name:
|
|
|||
|
Acquisition Date:
|
|
|||
|
Purchase Price Allocation
|
||||
|
Land
|
$
|
|
||
|
Building
|
|
|||
|
Site Improvements
|
|
|||
|
Tenant Improvements
|
|
|||
|
Lease in Place
|
|
|||
|
Leasing Commissions
|
|
|||
|
Legal & Marketing Lease Up Costs
|
|
|||
|
Total assets acquired
|
|
|||
|
Net leasehold asset (liability)
|
(
|
)
|
||
|
Total assets acquired, net
|
$
|
|
||
The total
depreciation expense of our operating properties for the three months ended September 30, 2022 and 2021 was $
706,262
and $
602,120
, respectively.
Operating Leases:
Our 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. We retain substantially all the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, we do not require a security deposit from tenants on our 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 sheets and were
immaterial as of September 30, 2022 and June 30, 2022.
The following table
presents the components of income from real estate operations for the three months ended September 30, 2022 and 2021:
|
Three Months Ended
|
Three Months Ended
|
|||||||
|
September 30, 2022
|
September 30, 2021
|
|||||||
|
Lease Income - Operating leases
|
$
|
|
$
|
|
||||
|
Variable lease income
(1)
|
|
|
||||||
|
$
|
|
$
|
|
|||||
|
|
(1) |
|
As of September 30, 2022, the future minimum rental
income from our real estate properties under non-cancelable operating leases are as follows:
|
Year ended June
30, :
|
Rental Income
|
|||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
Lease Intangibles, Above-Market Lease Assets and Below-Market
Lease Liabilities, Net
As of September
30, 2022, our 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,
2022, our 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)
|
|
-
|
|
|||||||||
Our amortization of lease intangibles, above-market
lease assets and below-market lease liabilities for the three months ended September 30, 2022 and 2021, were as follows:
|
Three Months Ended
|
||||||||||||
|
September 30, 2022
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Amortization
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Three Months Ended
|
||||||||||||
|
September 30, 2021
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
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, :
|
||||||||||||||||||||||||
|
2023 (remainder)
|
2024
|
2025
|
2026
|
2027
|
Thereafter
|
|||||||||||||||||||
|
In-place leases, to be included in amortization
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ |
|
||||||||||||
|
Above-market lease intangibles
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Below-market lease liabilities
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
) | ||||||||||||
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$ |
(
|
) | ||||||
NOTE 4 – INVESTMENTS
The following table summarizes the composition of our equity method investments
with fair value option election and other equity securities at fair value as of September 30, 2022 and June 30, 2022:
|
Fair Value
|
Fair Value
|
|||||||
| Asset Type | September 30, 2022 |
June 30, 2022
|
||||||
|
Non Traded Companies
|
$
|
|
$
|
|
||||
|
GP Interests (Equity method investment with fair value
option election)
|
|
|
||||||
|
LP Interests
|
|
|
||||||
|
LP Interests (Equity method investment with fair value
option election)
|
|
|
||||||
|
Investment Trust
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
Our above total investments at fair value are disclosed in two separate lines as investments and unconsolidated investments (non-securities) in the consolidated
balance sheets as of September 30, 2022 and June 30, 2022.
The following table presents fair value measurements of our investments as of
September 30, 2022, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Non Traded Companies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
GP Interests
|
|
|
|
|
||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
|
Investment Trust
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The following table presents fair value measurements of our investments as of
June 30, 2022, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Non Traded Companies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
GP Interests
|
|
|
|
|
||||||||||||
|
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 three months ended September 30, 2022:
|
Balance at July 1, 2022
|
$
|
|
||
|
Purchases of investments
|
|
|||
|
Transfers to Level I
|
(
|
)
|
||
|
Transfer to Investment in Real Estate
|
(
|
) | ||
|
Proceeds from sales, net
|
(
|
) | ||
|
Return of capital distributions
|
(
|
)
|
||
|
Net realized gains
|
|
|||
|
Net unrealized gains
|
|
|||
|
Ending balance at
September 30, 2022
|
$
|
|
The transfer of $
30,753
of investments from Level III to Level I category during the three months ended September 30, 2022 resulted from one of our 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 three months ended September 30, 2022, changes in unrealized gains, net
included in earnings relating to Level III investments still held at September 30, 2022 were $
3,206,722
.
The following is a reconciliation of the beginning and ending balances for
investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2021:
|
Balance at July 1, 2021
|
$
|
|
||
|
Purchases of investments
|
|
|||
|
Transfers to Level I
|
(
|
) | ||
|
Proceeds from sales, net
|
(
|
)
|
||
|
Return of capital distributions
|
(
|
) | ||
|
Net realized gains
|
|
|||
|
Net unrealized gains
|
|
|||
|
Ending balance at September 30,
2021
|
$
|
|
The transfers of $
229,621
from Level III to Level I category during the three months
ended September 30, 2021 resulted from one of our 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 three months ended September 30, 2021, changes in unrealized gains, net
included in earnings relating to Level III investments still held at September 30, 2021 were $
3,507,240
.
The following table shows quantitative information about significant
unobservable inputs related to the Level III fair value measurements used at September 30, 2022:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable
Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Company
|
$
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
|
|
||||||||
|
Non Traded Companies
|
|
Market Activity
|
Secondary market industry publication
|
|||||||||||
|
Contracted purchase of security
|
||||||||||||||
|
GP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|||||||||
|
Discount rate
|
|
|
||||||||||||
|
GP Interest
|
|
Market Activity
|
Contracted purchase of property
|
|||||||||||
|
LP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|||||||||
|
Liquidity discount
|
|
|||||||||||||
|
LP Interests
|
|
Discounted Cash Flow
|
Discount rate
|
|
|
|||||||||
|
LP Interest
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
|
||||||||||
|
LP Interest
|
|
Market Activity
|
Contracted sale of property
|
|||||||||||
|
Investment Trust
|
|
Estimated Liquidation Value
|
Liquidity discount
|
|
||||||||||
|
Contract negotiations
|
||||||||||||||
|
$
|
|
|||||||||||||
The following table shows quantitative information about significant unobservable inputs related to
the Level III fair value measurements used at June 30, 2022:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Companies
|
$
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
||||||||||
|
Liquidity discount
|
|
|
||||||||||||
|
Non Traded Companies
|
|
Market Activity
|
Secondary market industry publication
|
|||||||||||
| Contracted purchase of security | ||||||||||||||
|
GP Interests
|
|
Market Activity
|
Contracted purchase price
|
|||||||||||
|
LP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|||||||||
|
Liquidity discount
|
|
|||||||||||||
|
LP Interests
|
|
Discounted Cash Flow
|
Discount rate
|
|
|
|||||||||
|
LP Interests
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
|||||||||||
|
Liquidity discount
|
|
|||||||||||||
|
LP Interest
|
|
Market Activity
|
Secondary market industry publication
|
|||||||||||
|
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 September 30, 2022 and June 30, 2022, 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 September 30, 2022 and June 30, 2022, 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 September 30, 2022, which could have a material adverse effect on our business, financial condition and results of operations.
Summarized 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 the Rule 8-03(b)(3) of Regulation S-X applicable for smaller reporting companies, 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. The
rule requires summarized financial statements for any significant equity method investments in an annual and interim report if any of the three tests exceed 20%.
In addition to the SEC rules, ASC 323-10-50-3(c) requires summarized financial
statements of our equity method investments, including those reported under the fair value option, if they are material individually or in aggregate. Our investment in Dimension 28, LLP, Main Street West, LP and Citrus Park Hotel Holdings, LLC
were determined to be significant under the income test as of September 30, 2022. In addition, our equity method investments accounted under the fair value option were material in aggregate as of September 30, 2022.
The summarized financial information of Dimension 28, LLP, Main Street West, LP,
Citrus Park Hotel Holdings, LLC and aggregated summarized financial information of all equity method investees as of September 30, 2022 is as follows:
|
Dimension 28, LLP
|
Main Street West, LP
|
Citrus Park Hotel
Holdings, LLC
|
All Equity Method
Investee Aggregated |
|||||||||||||
|
Total Assets
|
$
|
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total Liabilities
|
$
|
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total Equities
|
$
|
|
$ |
(
|
) | $ |
|
$ |
|
|||||||
|
Total Revenues
|
$
|
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total Expenses
|
$
|
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total Net Income (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 September 30, 2022 and June 30, 2022, none of our investments in securities was considered an unconsolidated significant subsidiary under the SEC
rules described above.
NOTE 5 – ACQUISITIONS AND HELD FOR SALE
Acquisition of General Partnership Interests
As discussed in Note 1, in May 6, 2022 the Operating Partnership purchased
100
% of the membership interests in the
eight
Management Companies that own the
general partnership interests in
eight
limited partnerships, each of which own a Class A or B office property in Napa, Fairfield, Suisun
City or Woodland, California. Each Management Company is the sole general partner of each of the limited partnerships as disclosed in the following table:
|
General Partnership Interests
|
Management Companies
|
Total Purchase
Price
|
|||
|
1300 Main, LP
|
|
$
|
|
||
|
First & Main, LP
|
|
|
|||
|
Green Valley Medical Center, LP
|
|
|
|||
|
Main Street West, LP
|
|
|
|||
|
Martin Plaza Associates, LP
|
|
|
|||
|
One Harbor Center, LP
|
|
|
|||
|
Westside Professional Center I, LP
|
|
|
|||
|
Woodland Corporate Center II, LP
|
|
|
|||
|
Total
|
$
|
|
|||
The acquisition of general partnership interests was made in exchange for cash, preferred units in the Operating Partnership, and, in some cases, a
contingent liability as shown below:
|
General Partnership Interests
|
Number of
Preferred Units
issued
|
Amount of
Preferred Units
issued
|
Cash Payments
|
Contingent
Liability
|
Total Purchase
Price
|
|||||||||||||||
|
1300 Main, LP
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||
|
First & Main, LP
|
|
|
|
|
|
|||||||||||||||
|
Green Valley Medical Center, LP
|
|
|
|
|
|
|||||||||||||||
|
Main Street West, LP
|
|
|
|
|
|
|||||||||||||||
|
Martin Plaza Associates, LP
|
|
|
|
|
|
|||||||||||||||
|
One Harbor Center, LP
|
|
|
|
|
|
|||||||||||||||
|
Westside Professional Center I, LP
|
|
|
|
|
|
|||||||||||||||
|
Woodland Corporate Center II, LP
|
|
|
|
|
|
|||||||||||||||
|
Total
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||
The Operating Partnership’s preferred units are issued with a $
25
liquidation preference, but because Wiseman agreed to a
4-year
“lock-up” we
agreed to a discounted issuance price of $
22.50
per unit.
As discussed in Note 1, in July 2022, in addition to the general partnership interest, the Operating Partnership completed the acquisition of
100
% of the limited partnership interest in First & Main for total purchase price of $
3,376,322
, of which $
2,711,378
was paid through issuance of
120,505.66
Preferred Units of the Operating Partnership. Therefore, after the acquisition of the limited partnership interest, we consolidated the
financial statements of First & Main during the quarter ended September 30, 2022.
Contingent Consideration
As discussed in our June 30, 2022 financial statements, pursuant to the membership interest purchase agreement, the purchase price paid at closing for
the general partnership interests was reduced by
20
% as of the closing date for the property companies that had not received fully
executed and in force leases, the annualized scheduled rents of which are equal to or greater than the target scheduled rent as stated in the membership interest purchase agreement. This
20
% holdback will be paid upon a property company reaching the stabilization threshold, reduced by stabilization costs, as defined in the membership interest purchase agreement. Management
believes that it is probable that the stabilization thresholds will be reached for each of the property companies that did not meet this threshold at the acquisition date. Hence, the
20
% holdback was considered as a contingent liability in the consolidated balance sheet as of September 30, 2022. As of September 30, 2022 and June 30, 2022, contingent liability amounted to $
1,857,000
and $
2,715,000
, respectively.
Debt Guaranty
The property companies have mortgage loans with various banks and the loans are guaranteed by Wiseman and its owner, Doyle Wiseman and his trust. The
mortgage loans of 1300 Main, LP, One Harbor Center, LP, Martin Plaza Associates, LP, and Main Street West, LP are also guaranteed by the partnership’s general partner as the co-guarantor.
On July 1, 2022, subsequent to Operating Partnership’s acquisition of the management companies, Wiseman’s owner, Doyle Wiseman and the Operating
Partnership entered into an indemnity agreement whereby the Operating Partnership will indemnify Doyle Wiseman for any losses suffered by him through the default of a limited partnership on the mortgage secured by the property owned by the limited
partnership. Historically, none of the limited partnerships has had any defaults on any mortgages and Doyle Wiseman has not had to satisfy any mortgage default through a guaranty. Furthermore, each of the limited partnerships is adequately
capitalized, has sufficient cash flow from operations to service the mortgage notes and has not required Doyle Wiseman to provide any subordinated financial support to the limited partnerships. Therefore, we have
no
t recorded any liability related to the guaranty on the mortgage loans as of September 30, 2022.
Assets and Liabilities Held for Sale
On June 28, 2022, the Addison Property Owner entered into a forbearance agreement for the sale of Addison Corporate Center with the lender of the note
payable discussed in Note 9. As a result, the Addison Property Owner’s operations met the criteria to be classified as held for sale, which requires us to present the related assets and liabilities as separate line items in our consolidated balance
sheets. We recorded these assets and liabilities at fair value less any costs to sell. Therefore, we recorded an impairment loss allowance of $
9,126,461
on assets held for sale as of June 30, 2022.
No
additional impairment loss allowance was deemed necessary as of September 30, 2022.
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our consolidated
balance sheets:
|
September 30, 2022
|
June 30, 2022
|
|||||||
|
Assets
|
||||||||
|
Real estate assets
|
||||||||
|
Land
|
$
|
|
$
|
|
||||
|
Building, fixtures and improvements
|
|
|
||||||
|
Intangible lease assets
|
|
|
||||||
|
Less: accumulated depreciation and amortization
|
(
|
)
|
(
|
)
|
||||
|
Total real estate assets, net
|
|
|
||||||
|
Cash
|
|
|
||||||
|
Investments income, rents and other receivables
|
|
|
||||||
|
Due from related entities
|
|
|
||||||
|
Prepaid expenses and other assets
|
|
|
||||||
|
Allowance for impairment of assets held for sale
|
(
|
)
|
(
|
)
|
||||
|
Total assets
|
$
|
|
$
|
|
||||
|
Liabilities
|
||||||||
|
Deferred rent and other liabilities
|
$
|
|
$
|
|
||||
|
Accounts payable and accrued liabilities
|
|
|
||||||
|
Total liabilities
|
$
|
|
$
|
|
||||
We determined that the operations included in the table above did not meet the criteria to be classified as discontinued operations under the applicable
guidance.
NOTE 6 – 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. Our 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. We determine whether we
are 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. We reassess our
evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our 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 September 30, 2022 and June 30, 2022,
six
and
seven
of our unconsolidated
VIEs, respectively, include interests in limited partnerships and limited liability companies. We have determined that it is not the primary beneficiary of these entities because the managing partner or member of each of these entities has the
power to direct the activities that most significantly affect the VIE’s economic performance. Accordingly, these VIEs have not been consolidated with us, and they have been reported as investments at fair value in the September 30, 2022 and June
30, 2022, consolidated balance sheets.
The table below presents a summary of the nonconsolidated VIEs in which we hold variable interests:
|
Total Nonconsolidated VIEs
|
As of September 30, 2022
|
As of June 30, 2022 | ||||||
|
Fair value of investments in VIEs
|
$
|
|
$ |
|
||||
|
Carrying value of variable interests - assets
|
$
|
|
$ |
|
||||
|
Maximum Exposure to Loss:
|
||||||||
|
Limited Partnership Interest
|
$
|
|
$ |
|
||||
Our exposure to the obligations of VIEs is generally limited to the carrying value of the limited
partnership interests in these entities.
NOTE 7 – RELATED PARTY TRANSACTIONS
Advisory Agreements
Effective January 1,
2021
:
As discussed in Note 1, on January 26, 2021, our Board of Directors 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 we will continue to pay an Asset Management Fee on essentially the same terms as we were 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 us 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” our 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 Investment Adviser will receive an annual fee equal to $
100
for providing the investment advice to us as to our securities portfolio under the Amended and Restated Investment Advisory Agreement.
During the three months ended September 30, 2022 and 2021, we incurred asset
management fees of $
716,267
and $
676,552
,
respectively.
The asset management fees mentioned above were based on the following quarter
ended Invested Capital segregated in three columns based on the annual fee rate:
|
Asset Management Fee Annual %
|
|
|
|
|
|
|
Total Invested
Capital
|
|||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the three months ended September 30, 2022 and 2021, we did
no
t incur or accrue any incentive management fee under the new Advisory Management Agreement.
Property Management and Leasing Services:
On May 6, 2022, the Real Estate Adviser’s newly formed wholly owned subsidiary, Wiseman Company Management, LLC, purchased the property management
and leasing services rights from Wiseman. Therefore, effective the acquisition date, Wiseman Company Management has been providing the property management and leasing services to the
eight
property limited partnerships in accordance with the pre-existing agreements. There have been no changes to any of the management services agreements terms with the property
limited partnerships since the acquisition of the property management service rights.
Organization and Offering Costs Reimbursement:
As provided in the Offering Circular, offering costs incurred and paid by us in excess of $
550,000
in connection with the offering will be reimbursed by the Adviser except to the extent that
10
% in broker fees are not incurred. In such case, the broker savings were available to be paid by us for marketing expenses or other non-cash compensation. As of September 30, 2022,
we incurred $
829,454
of offering costs on our Offering Circular to sell the preferred stock, of which $
599,499
relates to syndication cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. As of June 30, 2022, we
incurred $
600,130
of offering costs on our Offering Circular to sell the preferred stock, of which $
501,917
relates to syndication cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. The total offering costs
incurred as of September 30, 2022 and June 30, 2022, were in excess of the total offering cost reimbursement threshold including the broker savings by $
229,955
and $
21,841
, respectively. The cumulative offering costs in excess of the reimbursable
threshold as of September 30, 2022 will be reimbursed by the Adviser during the quarter ending December 31, 2022. The excess amounts reimbursable from the Adviser as of September 30, 2022 and June 30, 2022, were netted against due to related
entities in the consolidated balance sheets.
Administration Agreement:
Under the Administration Agreement, we reimburse MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its
obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services,
subject to the independent directors’ approval. In addition, we reimburse MacKenzie for the fees and expenses associated with performing compliance functions, and its allocable portion of the compensation of our 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 us. No fee (only cost reimbursement) is being paid by us to MacKenzie for this service.
The administrative cost reimbursements for the three months ended September 30, 2022 and 2021, were $
181,500
and $
152,400
, respectively. Transfer agent services
cost reimbursement for the three months ended September 30, 2022 and 2021, were $
23,000
and $
26,601
, respectively.
The
table below outlines the related party expenses incurred for the three months ended September 30, 2022 and 2021, and unpaid as of
September 30, 2022, and June 30, 2022
.
|
Three Months Ended
|
Unpaid as of
|
|||||||||||||||
|
Types and Recipient
|
September 30, 2022
|
September 30, 2021
|
September 30, 2022
|
June 30, 2022
|
||||||||||||
|
Asset management fees- the Real Estate Adviser
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Asset acquisition fees- the Real Estate Adviser
(3)
|
|
|
|
|
||||||||||||
|
Administrative cost reimbursements- MacKenzie
|
|
|
|
|
||||||||||||
|
Transfer agent cost reimbursements - MacKenzie
|
|
|
|
|
||||||||||||
|
Organization & Offering Cost
(2)
- MacKenzie
|
|
|
|
|
||||||||||||
|
Other expenses
(1)
- MacKenzie and Subsidiary’s GP’s
|
|
|
|
|
||||||||||||
|
Due to related entities
|
$
|
|
$
|
|
||||||||||||
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
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. We own 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. We and TRS are the sole beneficiaries of the following series as of September 30, 2022, and
June 30, 2022:
|
|
• |
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 8 – MARGIN LOANS
We have a brokerage account through which
it buys and sells publicly traded securities. The provisions of the account allow us 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
used as collateral. As of September 30, 2022 and June 30, 2022, we had
no
margin credit available for cash withdrawal or the
ability to purchase in additional securities. Accordingly, as of September 30, 2022 and June 30, 2022, there was
no
amount
outstanding under this short-term credit line.
NOTE 9 – MORTGAGE NOTES
PAYABLE AND DEBT GUARANTY
Addison Property Owner
Mortgage Note Payable
Addison Property Owner
is the obligor under a note payable to Wells Fargo Bank, NA (the “Lender”) 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 Addison Property Owner.
On June 8, 2020, as
part of the Contribution Agreement, we 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, we 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 September 30, 2022 and June 30, 2022, were both $
19,604,382
,
which is disclosed as a part of the mortgage notes payable in the consolidated balance sheet. 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, we 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 September 30, 2022 and June 30, 2022, we have not recorded any debt guaranty obligation because we have not engaged in
inappropriate actions that would give rise to a guaranty obligation.
On
April 30, 2022, the notes payable matured and Addison Property Owner was unable to extend the loan. On June 28, 2022, Addison Property Owner entered into a forbearance agreement with the Lender. The loan is currently accruing interest at the
default rate as per the loan agreement.
As of September 30, 2022, Addison Corporate Center is being marketed for sale in accordance with all the conditions set forth in the forbearance
agreement. In addition, effective June 28, 2022, on monthly basis the lender will collect all cash revenues from Addison Corporate Center and deduct funds sufficient to satisfy monthly accrued interest at the default rate, any outstanding fees
and costs incurred by the lender. The excess cash will be made available to the borrower for the payment of previously approved budgeted operating expenses. Any funds remaining thereafter will be applied towards the unpaid loan principal balance.
Madison and PVT Mortgage
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
% per annum through April 1, 2026. Effective May 1, 2026, interest rates will be the average of the
most recently published yields on US Treasury securities adjusted a constant maturity of
one year
as published by the Federal
Reserve System in the Statistical Release H.15 plus
2.75
% per annum. The loans were obtained to finance the acquisition of the
Commodore Apartments and Pon De Leo Apartments, which are located in Oakland, California. The loans mature on
April 1, 2031
and
are cross-collateralized by both properties owned by Madison and PVT. The loan requires interest only monthly payments through April 1, 2026 and beginning May 1, 2026 monthly payments of principal and interests are due based on
360
months of amortization period. The remaining unpaid principal balance is due at maturity date. Accordingly, the outstanding loan balances as of
September 30, 2022 and June 30, 2022, was $
6,737,500
on Madison and $
8,387,500
on PVT mortgage loans, respectively. The mortgage notes payable balances are disclosed as a part of the mortgage notes payable in the consolidated balance
sheet.
PT Hillview Mortgage
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.The outstanding balances as of September 30, 2022,
and June 30, 2022, was $
16,804,689
, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheet. PT
Hillview also entered into an interest rate cap agreement on October 4, 2021, as required by the lender. We have not recorded the fair value and the changes in the fair value of the contract in our consolidated financial statements as the amounts
were insignificant to our consolidated financial statements.
We (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. We were 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.
MacKenzie Shoreline Mortgage Note Payable
On May 6, 2021, MacKenzie Shoreline entered into a loan agreement with Pacific Premier Bank, in the amount of $
17,650,000
. The annual interest rate shall be
3.65
%
for the first
60
months, and a variable interest rate based on a
6
-month CME Term Secured Overnight Financing Rate plus a margin of
3.00
percentage points, for months thereafter until maturity. The loan was obtained to finance the acquisition of Shoreline Apartments. The loan matures on
June 1, 2032
and is secured by Shoreline Apartments. The loan requires interest only monthly payments through June 30, 2027, and beginning July 1, 2027, monthly payments of principal and interests are due based on
360
months of amortization period. Accordingly, the outstanding loan balance as of September 30, 2022 and June 30, 2022, was $
17,650,000
, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheet.
First & Main Mortgage Note Payable
On January 4, 2021, First & Main entered into a loan agreement with Exchange Bank, in the amount of $
12,000,000
at a fixed annual interest rate of
3.75
%. The
loan was obtained to finance the acquisition of First & Main Office Building. The loan matures on
February 1, 2026
and is
secured by First & Main Office Building. The loan requires monthly payments of principal and interest based on
25
year
amortization period with the remaining principal balance due at maturity. The loan is guaranteed by Wiseman, but subsequently indemnified by the Operating Partnership on July 1, 2022 as discussed in Note 5. The outstanding balance of the loan
as of September 30, 2022 was $
11,523,657
, which is disclosed as a part of the mortgage notes payable in the consolidated balance
sheet. We consolidated First & Main with our consolidated financial statements during the quarter ended September 30, 2022; accordingly, this mortgage note payable is not included in our consolidated balance sheet as of June 30, 2022.
The following table provides the projected principal and interest payments on the loan for the next four years:
|
Year Ended June 30, :
|
Principal
|
Interest
|
||||||
|
2023 (remainder)
|
$
|
|
$
|
|
||||
|
2024
|
|
|
||||||
|
2025
|
|
|
||||||
|
2026
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
First & Main Other Note Payables:
Junior Debt
In 2018, the First & Main voted to issue $
1,000,000
in interest-only junior promissory notes. The notes were issued in 2018 & 2019 with a maturity date of
December 31, 2023
and
include
no
prepayment penalty for early retirement. Interest on the notes is payable on the first day of each month at
7
% per annum. The promissory notes are disclosed as a part of the notes payable in the consolidated balance sheet. We consolidated First & Main
with our consolidated financial statements during the quarter ended September 30, 2022; accordingly, these notes are not included in our consolidated balance sheet as of June 30, 2022.
First & Main Small Business Administration (“SBA”) Loan
In June 2020, First & Main borrowed $
151,000
from the SBA, under their Economic Injury Disaster Loan program. The loan will be paid back over
30
years at an annual interest rate
of
3.75
% starting in December 2022. Monthly payments will be $
731
. The loan is disclosed as a part of the notes payable in the consolidated balance sheet. We consolidated First & Main with our consolidated financial statements
during the quarter ended September 30, 2022; accordingly, this loan is not included in our consolidated balance sheet as of June 30, 2022.
Solar System Loan
In August 2020, First & Main borrowed $
220,000
from The Wiseman Family Trust to fund the installation of the solar power system at First & Main Office Building. The loan will be paid back over a period of
10
years at an annual interest rate of
5
%. Monthly payments of principal and interest will be $
1,486
. As of September 30, 2022, the outstanding balance of the loan amounted to $
196,426
and is disclosed as a part of the notes payable in the consolidated balance sheet. We consolidated First & Main with our consolidated financial statements
during the quarter ended September 30, 2022; accordingly, this loan is not included in our consolidated balance sheet as of June 30, 2022.
NOTE 10 – 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 three months ended
September 30, 2022
and 2021:
|
Three Months Ended
September 30, 2022
|
Three Months Ended
September 30, 2021
|
|||||||
|
|
|
|||||||
|
Net income attributable to common stockholders
|
$
|
|
$ |
|
||||
|
Basic and diluted weighted average common shares outstanding
|
|
|
||||||
|
Basic and diluted earnings per share
|
$
|
|
$ |
|
||||
NOTE 11 – SHARE
OFFERINGS AND FEES
During the three
months ended September 30, 2022, we issued
41,884.51
common shares with total gross proceeds of $
386,385
under the DRIP.
In September 2022, we issued
169.67
common shares at $
10.25
per share, to the Class A unit holders of the Operating Partnership as discussed in Note 1.
NOTE 12 – SHARE REPURCHASE PLAN
During the three months ended
September 30, 2022, we repurchased our own shares through our Share Repurchase Program and through third-party auctions as noted in the below table:
|
Period
|
Total Number
of Shares Repurchased
|
Average Repurchase Price
Per Share
|
Total Repurchase
Consideration
|
|||||||||
|
During the Quarter ended September 30,
2022
|
||||||||||||
|
September 1, 2022 through September 30, 2022
|
|
$
|
|
$
|
|
|||||||
|
|
|
$
|
|
|||||||||
On May 11, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of
Directors suspended our Share Repurchase Program. As a result, we did
no
t repurchase any shares during the three months ended September
30, 2021. We resumed the Share Repurchase Program on March 19, 2021.
NOTE 13 –STOCKHOLDER DIVIDENDS
On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of Directors unanimously
approved the suspension of regular quarterly dividends to our stockholders. On May 10, 2021, the Board of Directors resumed the quarterly dividends after reassessing our cash flow.
The following table reflects the dividends per share that we have declared on our common stock and preferred stock
during the three months ended September 30, 2022:
|
Dividends
|
||||||||||||||||
|
Common Stock
|
Preferred Stock
|
|||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the three months ended September 30, 2022, we paid total dividends of $
1,361,868
, of which $
391,214
has been
reinvested under our DRIP. Dividends declared during the quarter ended
September 30, 2022
, were paid in
.
Total distributions declared by the Operating Partnership for the Class A unit holders during the three months
ended September 30, 2022, was $
9,324
(which was $
0.10
per unit).
Total distributions declared by the Operating Partnership for the preferred unit holders during year ended June 30,
2022 was $
107,626
(which was
0.33
per unit).
On
June 28, 2022
, we declared the Series A Preferred stock quarterly dividend of $
0.375
per share payable at the rate of $
0.125
per month for holders of record as of
July 31, 2022
,
August 31, 2022
, and
September 30, 2022
. Subsequently, on
September 6, 2022
, we declared the Series A Preferred stock quarterly dividend of $
0.375
per share payable at the rate of $
0.125
per month for holders of record as of
October 31, 2022
,
November 30, 2022
, and
December 31, 2022
. The preferred stock dividend declared on June 28, 2022, was paid in
, and the preferred stock dividend declared on September 6, 2022, will be paid on or about
January 15, 2023
.
The following table reflects the dividends per share that we have declared on our common stock during the three months ended September 30, 2021:
|
Dividends
|
||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
||||||
|
|
$
|
|
*
|
$
|
|
|||
During the three months ended September 30, 2021, We paid total dividends of $
798,823
, of which $
243,488
has been
reinvested under our DRIP.
We did
no
t have any preferred shares outstanding as of September 30, 2021.
Statements by MacKenzie Realty Capital, Inc., its wholly owned subsidiaries MRC TRS, Inc. and MacKenzie Satellite Place Corp.. and, our 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.
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.
Our investment strategies include making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing, tenant improvements or encounter 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. In
such cases, we intend to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status.
We intend to continue our historical activities related to tender offers for shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions, subject to the
constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us 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 their 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, long distance telephone and staff;
|
|
|
• |
fees and expenses associated with independent audits and outside legal costs;
|
|
|
• |
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
|
|
|
• |
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses
incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and
related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.
|
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 September 30, 2022, 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 our status and applying the new basis of accounting, on the effective date of the termination of our status as a BDC, we 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 September 30, and June 30, 2022:
|
Fair Value
|
||||||||
|
Investments, at fair value
|
September 30, 2022
|
June 30, 2022
|
||||||
|
3100 Airport Way South LP
|
$
|
332,749
|
$
|
330,000
|
||||
|
5210 Fountaingate
|
6,820
|
6,820
|
||||||
|
American Healthcare REIT, Inc. – Class I
|
-
|
416,115
|
||||||
|
Capitol Hill Partners, LLC
|
1,533,300
|
1,518,100
|
||||||
|
Citrus Park Hotel Holdings, LLC
|
4,100,000
|
5,000,000
|
||||||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
75,213
|
49,178
|
||||||
|
Corporate Property Associates 18 Global A Inc.
|
-
|
42,256
|
||||||
|
Healthcare Trust, Inc.
|
3,351,913
|
3,866,394
|
||||||
|
HGR Liquidating Trust
|
732
|
732
|
||||||
|
Highlands REIT Inc.
|
3,984,784
|
3,750,385
|
||||||
|
KBS Real Estate Investment Trust II, Inc.
|
969,390
|
1,010,350
|
||||||
|
Lakemont Partners, LLC
|
831,880
|
806,290
|
||||||
|
Moody National REIT II, Inc.
|
15,950
|
15,969
|
||||||
|
Secured Income, LP
|
-
|
520,594
|
||||||
|
SmartStop Self Storage REIT, Inc Class A
|
114,952
|
120,922
|
||||||
|
SmartStop Self Storage REIT, Inc Class T
|
-
|
9,885
|
||||||
|
Strategic Realty Trust, Inc.
|
252,080
|
311,007
|
||||||
|
Summit Healthcare REIT, Inc.
|
1,052,267
|
1,973,211
|
||||||
|
Total
|
$
|
16,622,030
|
$
|
19,748,208
|
||||
|
Fair Value
|
||||||||
|
Unconsolidated investments (non-security), at fair value
|
September 30, 2022
|
June 30, 2022
|
||||||
|
1300 Main, LP
|
$
|
1,793,222
|
$
|
1,688,000
|
||||
|
Dimensions28 LLP
|
22,470,804
|
19,512,036
|
||||||
|
First & Main, LP
|
-
|
2,237,000
|
||||||
|
Green Valley Medical Center, LP
|
2,918,500
|
3,010,000
|
||||||
|
Main Street West, LP
|
5,047,000
|
4,708,000
|
||||||
|
Martin Plaza Associates, LP
|
686,000
|
725,000
|
||||||
|
One Harbor Center, LP
|
4,321,500
|
4,162,000
|
||||||
|
Westside Professional Center I, LP
|
1,874,000
|
1,803,000
|
||||||
|
Woodland Corporate Center II, LP
|
-
|
-
|
||||||
|
Total
|
$
|
39,111,026
|
$
|
37,845,036
|
||||
Properties
In addition to our investment securities, we currently own and manage three commercial real estate properties: Addison Corporate Center located in Windsor, CT, Satellite Place in Duluth, GA, and First
& Main Office Building in Napa, CA and four residential apartments: Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA, the Hollywood Property located in Los Angeles, CA, and the Shoreline Apartments in Concord, CA. These
seven properties are owned through our seven subsidiaries as noted in below table. First & Main, LP became a wholly owned subsidiary of the Operating Partnership in July 2022.
|
Property:
|
Property Owners
|
|
Addison Corporate Center
|
Addison Property Owner, LLC
|
|
First & Main Office Building
|
First & Main, LP
|
|
Commodore Apartments
|
Madison-PVT Partners LLC
|
|
Pon De Leo Apartments
|
PVT-Madison Partners LLC
|
|
Shoreline Apartments
|
MacKenzie BAA IG Shoreline LLC
|
|
Hollywood Property
|
PT Hillview GP, LLC
|
|
Satellite Place
|
MacKenzie Satellite Place Corp.
|
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. Addison Corporate
Center serves as a collateral to a loan which matured on April 30, 2022. After the maturity, Addison Property Owner was unable to extend the loan and entered into a forbearance agreement with the lender on June 28, 2022. Pursuant to the forbearance
agreement, the property is currently being marketed for sale. Accordingly, Addison Corporate Center is classified as an asset held for sale as of September 30, 2022. As of September 30, 2022, the property is occupied by 4 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
|
|||||
|
Triumph
|
Aircraft Design, Manufacturing, and Engineering
|
88,255
|
$
|
356,844
|
5/31/2027
|
No
|
||||
|
Belcan
|
Global Engineering and Consulting
|
66,072
|
$
|
1,200,148
|
9/30/2029
|
No
|
||||
|
Quest Diagnostics
|
Laboratory Services
|
65,459
|
$
|
1,273,723
|
10/31/2025
|
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
|
|||||||||
|
2025
|
2
|
70,164
|
$
|
1,363,571
|
47%
|
|
|||||||
|
2027
|
1
|
88,255
|
$
|
356,844
|
12%
|
|
|||||||
|
2029
|
1
|
66,072
|
$
|
1,200,148
|
41%
|
|
|||||||
First & Main Office Building contains 27,396 square feet, of which approximately 19.000 square feet is office space and the remainder is designated as retail space. As of September 30, 2022, the
property is 100% occupied by 8 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
|
|||||
|
GVM Law
|
Legal Services
|
9,470
|
$
|
478,452
|
9/20/2026
|
2, 5 years
|
||||
|
Brotlemarkle
|
Accounting Services
|
4,366
|
$
|
231,097
|
7/31/2030
|
2, 5 years
|
||||
|
Napa Palisades
|
Restaurant
|
3,462
|
$
|
182,268
|
8/31/2040
|
3, 5 years
|
||||
|
Moss Adams
|
Accounting Services
|
3,428
|
$
|
173,616
|
6/30/2023
|
2, 5 years
|
||||
The following information pertains to lease expirations at First & Main Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Rent
|
Percentage of Gross
Rent
|
|||||||||
|
2023
|
2
|
3,955
|
$
|
199,896
|
14%
|
|
|||||||
|
2024
|
1
|
1,135
|
$
|
67,188
|
5%
|
|
|||||||
|
2025
|
1
|
2,220
|
$
|
135,768
|
10%
|
|
|||||||
|
2026
|
1
|
9,470
|
$
|
478,452
|
34%
|
|
|||||||
|
Thereafter
|
3
|
10,550
|
$
|
659,880
|
37%
|
|
|||||||
Satellite Place is a six story office building contains 143,785 square feet of rentable office area located in Duluth, Georgia. As of September 30, 2022, the property is approximately 53% occupied by
1 tenant as listed in below table.
|
Largest Tenants
Business
|
Business
|
Square Ft.
Occupied
|
Rent per annum
|
Lease
Expiration
|
Renewal
options
|
|||||
|
OS National, LLC
|
Title Services
|
71,085
|
$
|
1,331,777
|
12/31/2029
|
2, 5 years
|
||||
The following information pertains to lease expirations at Satellite Place:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Rent
|
Percentage of Gross
Rent
|
|||||||||
|
2029
|
1
|
71,085
|
$
|
1,331,777
|
100%
|
|
|||||||
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of September 30, 2022, Commodore Apartment building is approximately 95.8% occupied. Pon De Leo Apartments is
also a mid-rise apartment building built in 1929 and has 39 units. As of September 30, 2022, Pon Do Leo Apartment building is approximately 97.4% occupied.
Hollywood Property, located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has 53 units. The property contains approximately 37,000 square feet of net rentable apartment area
and 8,560 square feet of retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 77.4% occupied as of September 30, 2022 as the property recently began to add tenants after renovations. The
property underwent extensive renovations in order to reposition the complex as a premier rental with significant rate increases over previous years. Virtually all of the renovations have been completed, with the final apartments scheduled to be
finished as remaining tenants vacate. A grand opening for the public was held in early April and marketing of the newly renovated units began in late April. Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015
which has 84 units. As of September 30, 2022, Shoreline Apartments building is approximately 88.1% occupied.
The following table provides information regarding each of the residential 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%
|
|
$
|
1,075,143
|
$
|
2,358
|
|||||||||
|
Commodore
|
Multi-Family Residential
|
Oakland, CA
|
31,156
|
48
|
95.8%
|
|
$
|
894,163
|
$
|
1,620
|
|||||||||
|
Hollywood Property
|
Multi-Family Residential
|
Los Angeles, CA
|
36,991
|
53
|
77.4%
|
|
$
|
1,126,079
|
$
|
2,234
|
|||||||||
|
Shoreline Apartments
|
Multi-Family Residential
|
Concord, CA
|
67,925
|
84
|
88.1%
|
|
$
|
1,851,960
|
$
|
2,085
|
|||||||||
|
Property Name
|
Sector
|
Location
|
Square Feet
|
Units
|
Percentage Leased
|
Annual Base Rent
|
Monthly Base Rent/Occupied
Unit
|
||||||||||||
|
Hollywood
Property
|
Retail
|
Los Angeles, CA
|
8,560
|
1
|
100.0%
|
|
$
|
314,220
|
$
|
26,185
|
|||||||||
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 our 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 Madison, 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 properties, Addison Corporate Center and Satellite Place, are class B and Class A suburban office properties located in Windsor, Connecticut and Duluth, Georgia, respectively.
Both properties 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 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.
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. 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 and any future outbreaks or variants 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.
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 our cash flow, the Board of Directors resumed the share redemptions in March of 2021 and 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 retains discretion to increase or decrease the distributions.
Three Months Ended September 30, 2022 and 2021
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the three months ended September 30, 2022, we generated $3.07 million in rental and
reimbursements revenues, of which $2.14 million was generated from the Addison Corporate Center, Hollywood Property, Shoreline Apartments and First & Main Office Building tenants, and $0.56 million from the two residential apartments and $0.37
million from the Satellite Place. During the three months ended September 30, 2021, we generated $2.72 million in rental and reimbursements revenues, of which $2.18 million was generated from the Addison Corporate Center tenants and $0.54 million
from the two residential apartments.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the three
months ended September 30, 2022 and 2021 was $0.45 million and $2.14 million, respectively. During the three months ended September 30, 2022, we received $0.33 million of distributions from operations, sales, and liquidations as compared to $1.77
million during the three months ended September 30, 2021. During the three months ended September 30, 2022, we received dividends, interest, and other investment income of $0.12 million as compared to $0.37 million received during the three months
ended September 30, 2021.
Expenses:
The Company’s asset management and incentive management fees are based on the advisory agreement that was effective January 1, 2021.
Asset management fee:
The asset management fees for the three months ended September 30, 2022 and 2021 were $0.72 million and $0.68 million, respectively.
Incentive management fee:
Under the Advisory Management Agreement, we pay 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.
We did not incur any incentive management fee for the three months ended September 30, 2022 and 2021.
Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended September 30, 2022, were $0.18 million as compared to $0.15 million for the three months ended September 30, 2021. The slight increase was due
to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to September 30, 2021, as a result of the increase in number of real estate assets owned by the us since September 2021.
Transfer agent cost reimbursement paid to MacKenzie for three months ended September 30, 2022 and 2021 were $0.02 million and $0.03 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 our commercial and residential real estate assets. During the three months ended September 30, 2022, we incurred operating and maintenance expenses of $1.83 million, of which $1.35 million mainly
were incurred in the operation of Addison Corporate Center, Hollywood Property, Shoreline Apartments and First & Main Office Building, $0.24 million were incurred in the operation of two residential apartments and $0.24 million were incurred in
the operation of the Satellite Place. During the three months ended September 30, 2021, we incurred operating and maintenance expenses of $1.39 million, of which $1.16 million mainly incurred in the operation of Addison Corporate Center. Operating
and maintenance expenses incurred in the operation of two residential apartments were $0.23 million.
Depreciation and amortization:
During the three months ended September 30, 2022, we recorded depreciation and amortization of $0.91 million, of which $0.55 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. $0.21 million of the total was related to the
depreciation and amortization of real estate assets and intangibles owned through MacKenzie Satellite. During the three months ended September 30, 2021, we recorded depreciation and amortization of $0.97 million, of which $0.82 million was the
depreciation and amortization of real estate and intangible assets it owned through the Operating Partnership. $0.15 million of the total related to the depreciation and amortization of real estate assets and intangibles owned through Madison and
PVT.
Interest expense:
Interest expense for the three months ended September 30, 2022 was $1.59 million, of which $1.47 million was incurred on the notes payable associated with Addison Corporate Center, Hollywood Property,
Shoreline Apartments and First & Main Office Building, and $0.12 million was incurred on the two mortgage notes payable associated with the two residential apartments. Interest expense for the three months ended September 30, 2021 was $0.35
million, of which $0.23 million was the interest expense incurred on the notes payable associated with the Addison Corporate Center and $0.12 million was the interest expense on the two mortgage notes payable associated with the two residential
apartments.
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
September 30, 2022 and 2021, were $0.33 million and $0.26 million, respectively. The increase in other operating expenses is due to the acquisition of new properties: Hollywood Property in October 2021, Shoreline Apartments in May 2022, Satellite
Place in June 2022 and First & Main Office Building in July 2022, resulting in higher amounts of general and administrative operating expenses during the three months ended September 30, 2022.
Net realized gain/loss on investments:
During the three months ended September 30, 2022, we had a realized gain of $0.52 million as compared to $0.60 million during the three months ended September 30, 2021. Total realized gains for the
three months ended September 30, 2022, were realized from sale of a publicly traded REIT securities with realized gain of $.01 million, four non-traded REIT securities with total realized gain of $0.18 million, and a limited partnership interest
with realized gains of $0.33 million. Total realized gains for the three months ended September 30, 2021, were realized from sales of a publicly traded REIT security with total realized gains of $0.07 million and six non- traded REIT securities
with net realized gain of $0.53 million.
Net unrealized gain/loss on investments:
During the three months ended September 30, 2022, we recorded net unrealized gains of $2
.84 million, which were net of $0.49 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 September 30, 2022 were $3.33 million, which resulted from fair value appreciations of $2.99 million from limited partnership interests, $0.65 million from
general partnership interests, and $0.03 million from investment trust and fair value depreciations of $0.34 million from non-traded REIT securities.
During the three months ended September 30, 2021, we recorded net unrealized gains of $3.29 million, which were net of $1.62 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 September 30, 2021, were $4.91 million, which resulted from fair value appreciations of $3.29 million from non-traded REIT securities, $1.48 million from limited partnership interests, and $0.14 million from limited partnership
interest.
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, 2021. Therefore, it did not incur any tax expense or excise tax on its income
from operations during the quarterly periods within the tax year 2021. 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 2022.
TRS, MacKenzie NY 2, and MacKenzie Satellite are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2022, they did not
have any taxable income for tax years 2021 or 2022. Therefore, TRS, MacKenzie NY 2, and MacKenzie Satellite did not record any income tax provisions during any fiscal period within the tax year 2021 and 2022.
The Operating Partnership is a limited partnership and its wholly owned subsidiaries, the Addison Property Owner and MacKenzie Shoreline, are limited liability companies. 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 three entities.
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 September 30, 2022, we have
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 $12.94 million from the issuance of shares under the DRIP. Of the total capital raised from the public
offerings as of September 30, 2022, we have used $12.03 million to repurchase shares under our share repurchase program. In November 2021, the SEC qualified our offering statement pursuant to Regulation A to sell up to $50,000,000 of shares of
our Series A preferred stock at an initial offering price of $25.00 per share. We raised $
7.99
million pursuant to the Offering Circular as of September 30, 2022. 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 distributions to holders of our common stock (from investment income and realized capital gains), and
paying operating expenses.
We finished the three months ended September 30, 2022 with cash and cash equivalents, restricted cash, and receivables of $11.99 million, and approximately $4.30 million of current liabilities.
Because of our strong liquidity and the liquidity preservation measures taken by the board, we are currently capable of meeting all of our obligations and continue our operations for the foreseeable future. We intend to continue to qualify as a
REIT and to meet the associated testing requirements, including paying out at least 90% of our taxable income.
Cash Flows:
Three months ended September 30, 2022:
For the three months ended September 30, 2022, we experienced a net increase in cash of $2.91 million. During this
period
, we generated cash of
$3.21 million from our financing activities, $0.55 million from our investing activities and used $0.85 million in our operating activities.
The net cash outflow of $0.85 million from operating activities resulted from $4.33 million of rental revenues and $0.45 million of investment income offset by $5.63 million of cash used in operating
expenses.
The net cash
inflow
of $0.55 million from investing activities resulted from real estate acquisitions through our subsidiaries of $1.22 million,
investment acquisition deposit of $0.37 million, payment of contingent liability of $0.86 million and purchases of equity investments of $0.11 million offset by cash inflows of $2.08 million from sale of investments, and $1.03 million from
distributions received from our investments that are considered return of capital.
The net cash inflow of $3.21 million from financing activities resulted from payment of dividends of $0.97 million, $0.35 million redemption of common stocks, payments of syndication
cost amounting to $0.54 million, capital distributions to non-controlling interests holders amounting to
$0.06
million and $0.05 million payment of mortgage payables offset by $5.03 million proceeds from the
issuance of preferred stock and $0.15 million
from
capital pending acceptance.
Three months ended September 30, 2021:
For the three months ended September 30, 2021, we experienced a net increase in cash of $3.89 million. During this period, we generated cash of $1.05 million from our operating activities and $3.61
million from our investing activities and used $0.77 million in our financing activities.
The net cash inflow of $1.05 million from operating activities resulted from $2.79 million of rental revenues and $2.14 million of investment income offset by $3.88 million of cash used in operating
expenses.
The net cash outflow of $3.61 million from investing activities resulted from real estate acquisitions through our subsidiaries of $7.62 million and purchases of equity investments of $0.11 million
offset by cash inflows of $7.48 million from sale of investments and $3.86 million from distributions received from our investments that are considered return of capital.
The net cash outflow of $0.77 million from financing activities resulted from payment of dividends of $0.56 million and payments on existing note payables of $0.21 million.
Material Cash Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Management 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 Management 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 Parent 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 September 30, 2022, total loan outstanding at the underlying companies amounted to $80,335,774, of which $19,604,382 was the loan associated with Addison Corporate Center that was being held for sale as of
September 30, 2022.
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, our Board of Directors suspended regular quarterly distributions to our stockholders. However, on May 10, 2021, the Board of Directors
reinstated the quarterly distributions after reassessing our cash flow 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
.
For the quarter ended September 30, 2022, the Board approved a quarterly dividend of $0.375 per Series A preferred share payable at the rate of $0.125 per month. The Board also approved a quarterly dividend of $0.105
per common share to the holders of record as of September 30, 2022.
Our portfolio primarily consists of equity and debt investments in smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our
investments are considered speculative in nature. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital. At September 30, 2022,
financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 28% 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 September 30, 2022, 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, 2022.
None.
Issuer Purchases of Equity Securities
The following table presents information with respect to our purchases of our 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 September 30, 2022
|
|
|||||||||||||||
|
September 1, 2022 through September 30, 2022
|
40,817.06
|
$
|
9.47
|
40,817.06
|
-
|
|||||||||||
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: November 14, 2022
|
By: /s/ Robert Dixon
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
Date: November 14, 2022
|
By: /s/ Angche Sherpa
|
|
|
|
Treasurer and Chief Financial Officer
|
|
41
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 Acquisitions and Held For SaleNote 6 Variable Interest EntitiesNote 7 Related Party TransactionsNote 8 Margin LoansNote 9 Mortgage Notes Payable and Debt GuarantyNote 10 Earnings Per ShareNote 11 Share Offerings and FeesNote 12 Share Repurchase PlanNote 13 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