10-Q 1 form10q_021314.htm FORM 10-Q form10q_021314.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark one)
 
R
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended December 31, 2013
   
£
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from _________ to __________
   
Commission file number 000-55006
   
MacKenzie Realty Capital, Inc.
(Exact name of registrant as specified in its charter)
   
Maryland
45-4355424
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1640 School Street, Moraga, California 94556
(Address of principal executive offices)
   
(925) 631-9100
(Registrant’s telephone number, including area code)
   
 
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
   
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R    No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes £    No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer       £    Accelerated filer £      Non-accelerated filer R     Smaller reporting company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £    No R
 
The number of the issuer’s Common Stock outstanding as of February 14, 2014 was 744,017.
 

 
 

 
 
TABLE OF CONTENTS

 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Statements of Assets and Liabilities as of December 31, 2013 (Unaudited) and June 30, 2013
1
 
Schedule of Investments as of December 31, 2013 (Unaudited)
2
 
Schedule of Investments as of June 30, 2013
3
 
Statements of Operations for the three and six months ended December 31, 2013 and 2012 (Unaudited)
4
 
Statements of Changes in Net Assets for the six months ended December 31, 2013 (Unaudited), and the year ended June 30, 2013
5
 
Statements of Cash Flows for the six months ended December 31, 2013 and 2012 (Unaudited)
6
 
Notes to Financial Statements
7-15
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16-20
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
 
 
 
Item 4.
Controls and Procedures
20
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
21
 
 
 
Item 1A.
Risk Factors
21
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21
 
 
 
Item 3.
Defaults Upon Senior Securities
21
 
 
 
Item 4.
Mine Safety Disclosures
21
 
 
 
Item 5.
Other Information
21
 
 
 
Item 6.
Exhibits
22
 
 
 
SIGNATURES
 
23-28
 
 
 

 
 

 



Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MacKenzie Realty Capital, Inc.
Statements of Assets and Liabilities
December 31, 2013 and June 30, 2013


   
December 31, 2013
   
June 30, 2013
 
   
(Unaudited)
       
Assets
 
 
       
Investments, at fair value (cost of $6,722,497 and $6,735,644, respectively)
  $ 6,974,885      $ 6,855,708   
Cash and cash equivalents
    80,556        262,806   
Accounts receivable
    247,992        9,219   
Other assets
    58,793        41,040   
Deferred offering costs (net of accumulated amortization of $177,010 and $0, respectively and $0, respectively)     247,815        424,825   
Total assets
  $ 7,610,041      $ 7,593,598   
                 
Liabilities
               
Accounts payable and accrued liabilities
  $ 71,966      $ 264,273   
Due to related entities
    48,215        35,393   
Deferred tax liability
    124,333           
Total liabilities
    244,514        299,666   
                 
Net assets
               
Common stock, $0.0001 par value, 80,000,000 shares authorized; 728,217 and 728,217 shares issued and outstanding respectively     73        73   
Capital in excess of par value
    7,282,097        7,282,097   
Retained earnings
    83,357        11,762   
Total net assets
  $ 7,365,527      $ 7,293,932   
                 
Net asset value per share of common stock
  $ 10.11      $ 10.02  


The accompanying Notes to Financial Statements are an integral part of these financial statements.

 
1

 

MacKenzie Realty Capital, Inc.
Schedule of Investments
December 31, 2013
(Unaudited)

Name
 
Asset Type
 
Shares/Units
   
Cost Basis
   
Total Fair Value
   
% of
Net Assets
 
 
 
 
 
 
   
 
   
 
   
 
 
Agree Realty Corporation
 
Public REIT
    4,200.00      $ 117,894      $ 121,888        1.65   
Apartment Investment and Management Company
 
Public REIT
    3,888.00        115,163         100,738        1.37   
Ashford Hospitality Prime, Inc.
 
Public REIT
    3,800.00        73,552        69,160        0.94   
Ashford Hospitality Trust, Inc.
 
Public REIT
    19,000.00        150,078        157,320        2.14   
Associated Estates Realty Corporation
 
Public REIT
    4,000.00        69,920        64,200        0.87   
CommonWealth REIT
 
Public REIT
    16,900.00        426,725       393,939        5.35   
Empire State Realty OP, L.P.
 
Public REIT
    5,000.00        64,775        68,200        0.93   
Empire State Realty Trust, Inc. Class A
 
Public REIT
    60,182.00        799,819        920,785        12.50   
FelCor Lodging Trust Incorporated
 
Public REIT
    6,300.00        51,604        51,408        0.70   
Rouse Properties Inc
 
Public REIT
    2,500.00        55,703        55,475        0.75   
                                         Total Public REIT
 
 
            1,925,233        2,003,113        27.20   
 
 
 
                               
Apple REIT Nine, Inc.
 
Non-traded REIT
    5,068.24        31,133        40,698        0.55   
Apple REIT Seven, Inc.
 
Non-traded REIT
    1,000.00        5,325        8,060        0.11   
BellaVista Capital, Inc.
 
Non-traded REIT
    123,987.00        49,595        47,115        0.64   
Hines Real Estate Investment Trust, Inc.
 
Non-traded REIT
    2,692.31        13,569        14,000        0.19   
            Total Non-traded REIT
 
 
            99,622        109,873        1.49   
 
 
 
                               
Brown Palace Hotel Associates, LP
 
LP Interest
    0.25        35,750        52,055        0.69   
Corporate Property Associates 16
 
LP Interest
    6,357.49        55,597        71,522        0.97   
Del Taco Income Properties IV
 
LP Interest
    2,296.00        59,696        65,459        0.89   
Del Taco Restaurant Properties I
 
LP Interest
    287.00        207,358        222,385        3.02   
Del Taco Restaurant Properties II
 
LP Interest
    273.00        60,459        62,315        0.85   
DRV Holding Company, LLC
 
LP Interest
    500.00        500,000        500,000        6.79   
El Conquistador Limited Partnership
 
LP Interest
    2.00        80,976        95,614        1.30   
Hotel Durant, LLC
 
LP Interest
    7.10        577,299        512,365        6.96   
Inland Land Appreciation Fund II, L.P.
 
LP Interest
    210.97        19,177        27,958        0.38   
Inland Land Appreciation Fund, L.P.
 
LP Interest
    149.37        18,166        19,609        0.27   
Madison Place Associates, LLC
 
LP Interest
    6.80        77,943        112,710        1.53   
MPF Pacific Gateway - Class B  *
LP Interest
    23.20        6,287          6,961        0.09   
National Property Investors 6
 
LP Interest
    7.00        145        105         
Post Street Renaissance Partners Class A
 
LP Interest
    9.10        177,844        178,279        2.42   
Post Street Renaissance Partners Class D
 
LP Interest
    11.60        542,115       550,639        7.48   
Rancon Realty Fund IV
 
LP Interest
    975.00        173,706        243,750        3.31   
Rancon Realty Fund V
 
LP Interest
    941.00        166,639        164,675        2.24   
Secured Income, LP
 
LP Interest
    25,600.00        223,232        224,000        3.04   
Uniprop Manufactured Housing Income Fund II, LP
 
LP Interest
    12,156.00        54,476        61,388        0.83   
                                         Total LP Interest
 
 
            3,036,865        3,171,789        43.06   
 
 
 
                               
Coastal Realty Business Trust, REEP, Inc.  *
Investment Trust
    72,320.00        73,555        81,722       1.12   
Coastal Realty Business Trust, Secured Income  *
Investment Trust
    37,577.00        327,671        328,799       4.46   
Coastal Realty Business Trust, Series F2  *
Investment Trust
    10,000.00        58,800        61,600       0.84   
Coastal Realty Business Trust, Series H2  *
Investment Trust
    47,284.16        246,351        269,047       3.65   
Coastal Realty Business Trust, Series L2  *
Investment Trust
    7,950.00        18,444        15,741       0.21   
Coastal Realty Business Trust, Series Q  *
Investment Trust
    10.00        467,341        474,586       6.44   
              Total Investment Trust
 
 
            1,192,162        1,231,495       16.72   
 
 
 
                               
BR Cabrillo LLC Promissory Note
 
Note
    21,861.45        218,615        218,615       2.97   
TTLC  Note
 
Note
    25,000.00        250,000        240,000       3.26   
                                         Total Note
 
 
            468,615        458,615       6.23   
 
 
 
                               
Total Investments
 
 
          $ 6,722,497      $ 6,974,885       94.70   
 
 
 
                               

* Investments in related parties.






The accompanying Notes to Financial Statements are an integral part of these financial statements.

 
 
 
2

 

MacKenzie Realty Capital, Inc.
Schedule of Investments
June 30, 2013

Name
 
Asset Type
 
Shares/Units
   
Cost Basis
   
Total Fair Value
   
% of
Net Assets
 
Agree Realty Corporation
 
Public REIT
    4,200.00      $ 117,894      $ 123,983        1.70   
Apartment Investment and Management Company
 
Public REIT
    3,888.00        115,163        116,796        1.60   
Ashford Hospitality Trust, Inc.
 
Public REIT
    19,000.00        223,630        217,550        2.98   
Associated Estates Realty Corporation
 
Public REIT
    4,000.00        69,920        64,320        0.88   
CommonWealth REIT
 
Public REIT
    16,900.00        426,725        390,728        5.36   
FelCor Lodging Trust Incorporated
 
Public REIT
    9,900.00        52,642        58,509        0.80   
Rouse Properties Inc
 
Public REIT
    3,077.00        56,753        60,371        0.83   
                                         Total Public REIT
 
 
            1,062,727        1,032,257        14.15   
 
 
 
                               
BellaVista Capital, Inc.
 
Non-traded REIT
    123,987.00        74,392        59,514        0.82   
Hines Real Estate Investment Trust, Inc.
 
Non-traded REIT
    2,692.31        13,569        11,900        0.16   
USA Real Estate Investment Trust
 
Non-traded REIT
    6.57        330        223        0.01   
             Total Non-traded REIT
 
 
            88,291        71,637        0.99   
 
 
 
                               
60 East 42nd St. Associates L.L.C
 
LP Interest
    0.38        56,700        107,431        1.47   
250 West 57th St. Associates L.L.C.
 
LP Interest
    0.67        66,670        95,087        1.30   
AEI Net Lease Income & Growth Fund XX Limited Partnership
 
LP Interest
    16.00        11,432        11,100        0.15   
Brown Palace Hotel Associates, LP
 
LP Interest
    0.25        35,750        35,628        0.49   
Civic Center, LP
 
LP Interest
    2.00        163,994        160,186        2.20   
CRI Hotel Income Partners, LP
 
LP Interest
    15,961.00        64,642        55,864        0.77   
Del Taco Restaurant Properties I
 
LP Interest
    287.00        207,358        222,385          3.05   
Del Taco Restaurant Properties II
 
LP Interest
    273.00        60,459        62,315        0.85   
Del Taco Restaurant Properties III
 
LP Interest
    628.00        125,983        139,303        1.91   
Del Taco Income Properties IV
 
LP Interest
    2,296.00        59,696        65,459        0.90   
Divall Insured Income Properties 2, LP
 
LP Interest
    830.33        211,926        222,220        3.05   
DRV Holding Company, LLC
 
LP Interest
    500.00        500,000        500,000        6.86   
El Conquistador Limited Partnership
 
LP Interest
    2.00        80,976        88,761        1.22   
Empire State Building Associates L.L.C.
 
LP Interest
    2.50        449,150        562,500        7.71   
Hotel Durant, LLC
 
LP Interest
    7.10        577,299        529,512        7.26   
Inland Land Appreciation Fund, L.P.
 
LP Interest
    149.30        18,166        19,600        0.27   
Inland Land Appreciation Fund II, L.P.
 
LP Interest
    211.00        27,951        25,936        0.36   
Madison Place Associates, LLC
 
LP Interest
    6.80        77,943        105,530        1.45   
MPF Pacific Gateway - Class B  *
LP Interest
    23.20        6,287        6,960        0.10   
National Property Investors 6
 
LP Interest
    7.00        145        129         
NCP-Seven Liquidating Trust
 
LP Interest
    79.00        1,694        1,691        0.02   
Post Street Renaissance Partners Class A
 
LP Interest
    9.10        177,844        163,094        2.24   
Post Street Renaissance Partners Class D
 
LP Interest
    11.60        542,115        481,488        6.60   
Rancon Realty Fund IV
 
LP Interest
    975.00        173,706        220,565        3.02   
Rancon Realty Fund V
 
LP Interest
    935.00        165,691        165,093        2.26   
Secured Income, LP
 
LP Interest
    25,600.00        223,232        224,512        3.08   
Uniprop Manufactured Housing Income Fund II, LP
 
LP Interest
    12,156.00        56,890        61,996        0.82   
                                         Total LP Interest
 
 
            4,143,699        4,334,345        59.41   
 
 
 
                               
Coastal Realty Business Trust, REEP, Inc.  *
Investment Trust
    72,320.00            72,320        73,043       1.00   
Coastal Realty Business Trust, Secured Income  *
Investment Trust
    37,577.00        327,671        329,550       4.52   
Coastal Realty Business Trust, Series F2  *
Investment Trust
    10,000.00        58,800        59,900       0.82   
Coastal Realty Business Trust, Series H2  *
Investment Trust
    47,284.16        246,351        274,248       3.76   
Coastal Realty Business Trust, Series L2  *
Investment Trust
    7,950.00        18,444        15,741       0.22   
Coastal Realty Business Trust, Series Q  *
Investment Trust
    10.00        467,341        414,987       5.69   
             Total Investment Trust
 
 
            1,190,927        1,167,469       16.01   
 
 
 
                               
TTLC Note
 
Note
            250,000          250,000       3.43   
                                        Total Note
 
 
            250,000        250,000       3.43   
 
 
 
                               
Total Investments
 
 
          $ 6,735,644      $ 6,855,708       93.99   

* Investments in related parties.













The accompanying Notes to Financial Statements are an integral part of these financial statements.


 


 
3

 
 

 
MacKenzie Realty Capital, Inc.
Statements of Operations
For The Three and Six Months Ended December 31, 2013 and 2012
(Unaudited)

             
   
For The Three Months Ended
December, 31
   
For The Six Months Ended
December, 31
 
   
2013
   
2012
   
2013
   
2012
 
                         
Investment income
                       
Dividend and distribution income
  $ 86,838      $     $ 136,312      $  
Interest and other income
    7,458              12,461         
Total investment income
    94,296              148,773         
                                 
Operating expenses
                               
Investment advisory fees
    54,616              109,233         
Administrative cost reimbursements
    12,000        -       36,000         
Organization costs
          12,140              15,790   
Amortization of deferred offering costs
    106,206              177,010         
Professional fees
    21,388              84,254         
Other general and administrative
    19,940        1,000        40,031        1,809   
Total operating expenses
    214,150        13,140        446,528        17,599   
                                 
Net investment loss
    (119,854)        (13,140)        (297,755)        (17,599)   
                                 
Net realized gain on sale of investments
    410,262              409,410         
Net unrealized gain on investments
    48,249              132,324         
Total net realized and unrealized gain on investments
    458,511         -        541,734         
                                 
Income tax provision
    172,384              172,384         
                                 
Net increase (decrease) in net assets resulting from operations
  $ 166,273      $ (13,140)      $ 71,595      $ (17,599)     
                                 
Net increase (decrease) in net assets resulting from operations per share
  $ 0.23      $ (0.37)      $ 0.10      $ (0.49)   
                                 
Weighted average common shares outstanding
    728,217        36,000        728,217        36,000   
                                 








The accompanying Notes to Financial Statements are an integral part of these financial statements.

 
4

 



MacKenzie Realty Capital, Inc.
Statements of Changes in Net Assets
For The Six Months Ended December 31, 2013 and The Year Ended June 30, 2013




   
For The Six Months Ended
   
For The Year Ended
 
   
December 31, 2013
   
June 30, 2013
 
   
(Unaudited)
       
Operations
           
Net investment loss
  $ (297,755)      $ (111,581)   
Net realized gain on sale of investments
    409,410          56,219   
Net unrealized gain on investments
    132,324        120,065   
Income tax provision
    (172,384)         
Net increase in net assets resulting from operations
    71,595        64,703   
                 
Capital share transactions
               
Issuance of common stock
          6,922,170   
Net increase in net assets resulting from capital share transactions
          6,922,170   
                 
Total increase in net assets
    71,595        6,986,873   
                 
Net assets at beginning of period
    7,293,932        307,059   
                 
Net assets at end of period
  $ 7,365,527      $ 7,293,932   
                 




 





The accompanying Notes to Financial Statements are an integral part of these financial statements.

 
5

 


MacKenzie Realty Capital, Inc.
Statements of Cash Flows
For The Six Months Ended December 31, 2013, and 2012
(Unaudited)

       
   
For The Six Months Ended December 31,
 
   
2013
   
2012
 
             
Cash flows from operating activities:
 
 
       
Net increase (decrease) in net assets resulting from operations
  $ 71,595      $ (17,599)     
Adjustments to reconcile net decrease in net assets resulting from
               
operations to net cash used in operating activities:
               
Proceeds from sale of investments, net
    721,763         
Return of capital
    185,730         
Purchase of investments
    (484,936)         
Net realized gain on sale of investments
    (409,410)         
Net unrealized gain on investments
    (132,324)         
Amortization of deferred offering costs
    177,010         
Changes in assets and liabilities:
               
Accounts receivable
    (238,773)         
Deferred offering costs
          (109,261)   
Other assets
    (17,753)        2,660   
Accounts payable and accrued liabilities
    (192,307)        (16,261)   
Due to related entities
    12,822        (1,088)   
Deferred tax liability
    124,333         
Net cash from operating activities
    (182,250)        (141,549)   
                 
Net decrease in cash and cash equivalents
    (182,250)        (141,549)   
                 
Cash and cash equivalents at beginning of the period
    262,806        161,069   
                 
Cash and cash equivalents at end of the period
  $ 80,556      $ 19,520   
                 




















The accompanying Notes to Financial Statements are an integral part of these financial statements.


 
6

 



MacKenzie Realty Capital, Inc.
Notes to Financial Statements
December 31, 2013
(Unaudited)

NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION

MacKenzie Realty Capital, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012, and has been active in matters relating to its organization as a non-diversified, closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). The Company is authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as Common Stock, with a $0.0001 par value per share; and (ii) 20,000,000 are designated as Preferred Stock, with a $0.0001 par value per share.

The Company filed a registration statement on June 1, 2012 and several pre- and post-effective amendments with the Securities and Exchange Commission (“SEC”) to register the initial public offering of 5,000,000 shares of common stock for sale. The registration statement was declared effective by the SEC on August 2, 2013. The Company commenced its operations on February 28, 2013.  The Company intends to operate so as to qualify to be taxed as a real estate investment trust (“REIT”) as defined under Subchapter M of the Internal Revenue Code of 1986 (the “Code”) commencing tax year ending December 31, 2014. The Company’s fiscal year-end is June 30.

The Company is managed by MacKenzie Capital Management, LP (“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013.  MacKenzie manages all of the Company’s affairs except for providing investment advice. The Company is advised by MCM Advisers, LP (the “Adviser”) under the advisory agreement dated and effective as of February 28, 2013. The Company intends to pursue a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate.  These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships, limited liability companies, and tenancies-in-common.

On February 28, 2013, the Company acquired, under an exchange agreement (“Contribution Agreement”), a portfolio of investments and cash (“Legacy Portfolio”) from eight private funds: MP Income Fund 16, LLC, MP Income Fund 18, LLC, MP Income Fund 19, LLC, MP Value Fund 5, LLC, MP Value Fund 7, LLC, MPF Flagship Fund 9, LLC, MP Income Fund 20, LLC, and Mackenzie Patterson Special Fund 6, LLC, which are collectively referred to as “Legacy Funds.” The Legacy Funds are managed by MacKenzie. The assets acquired from the Legacy Funds had a collective fair value of approximately $6.9 million ($6.4 million in investments and $500 thousand in cash) as of February 28, 2013. As consideration for the Company’s acquisition of the Legacy Portfolio, the Company issued 692,217 shares of the Company’s common stock to the Legacy Funds. In addition, in 2012 prior to the acquisition of the Legacy Portfolio, each of the Legacy Funds and MP Value Fund 8, LLC, a private investment fund managed by MacKenzie,  purchased 4,000 shares of the Company’s common stock at $10 per share in order to provide the Company with funds to complete this exchange and prepare its initial public offering.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s assets and liabilities as of December 31, 2013 and the results of its operations for the three and six months periods ended December 31, 2013 and 2012, which results are not necessarily indicative of results on an annualized basis.  Statement of assets and liabilities amounts as of June 30, 2013 have been derived from audited financial statements. The Company follows the financial reporting standards for investment companies set forth in GAAP.  Accordingly, the Company’s investments are recorded at estimated fair value in the statements of assets and liabilities with changes in unrealized gains (losses) in the fair value of such investments included within the Company’s statement of operations.

These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2013 included in the Company’s 10-K filed with the SEC.

Use of Estimates: The preparation of 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 Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to certain limits. At times the cash balances held in financial institutions by the Company may exceed these insured limits.




 

 

Organization Costs:  Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the initial registration statement and auditing the initial statement of assets and liabilities. These costs are expensed as incurred. For the three and six months ended December 31, 2012, the Company incurred organization costs of $12,140 and $15,790, respectively. For the three and six months ended December, 31, 2013, the Company incurred organization costs of $0 and $10,080, respectively; however, in accordance with the Company’s agreement with the Adviser, organization costs incurred for the six months ended December 31, 2013 were reimbursed to the Company by the Adviser as discussed below under note 4 as organization and offering cost reimbursement.

Deferred Offering Costs:  The Company’s deferred offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statement. These offering costs have been deferred and expensed over a twelve month period beginning on August 2, 2013 (the effective date of the Company’s registration statement filed with the SEC). As of December 31, 2013, and June 30, 2013, the Company had deferred offering costs of $424,825. For the three and six months ended December 31, 2013, the company incurred $48,290 and $141,779, respectively, of offering costs; however, in accordance with the Company’s agreement with the Adviser, offering costs incurred for the three and six months ended December 31, 2013 were reimbursed to the Company by the Adviser as discussed below under note 4 as organization and offering cost reimbursement.

Amortization of the deferred offering cost for the three and six months ended December 31, 2013 were $106,206 and $177,010, respectively. Amortization of the deferred offering costs for the three and six months ended December 31, 2012 were $0.

Income Taxes and Deferred Tax Liability:  
 
Under ASC 740-10-25, the Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, the Company considers all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment.

As of December 31, 2013, the Company has recognized deferred tax liability of $124,333 relating to deferred taxable income of $312,126 primarily consisting of net unrealized gains on investments as of December 31, 2013 which become taxable in the future periods when realized. The Company will reverse the deferred tax liability upon its election to be taxed as a REIT which is contemplated to be in tax year ending December 31, 2014.

The provision for income taxes included in our financial statements includes both a current portion and a deferred portion. The following table shows the breakdown between the current and deferred income taxes for the period ended December 31, 2013:

   
2013
Current tax provision
   
Federal
  $ 41,013 
State
    7,038 
Total current
    48,051 
       
Deferred tax provision
     
Federal
    106,122 
State
    18,211 
Total deferred
    124,333 
       
Total tax provision    $ 172,384 
 
The following table shows the tax effect of our cumulative temporary differences of December 31:
 
   
2013
Income deferred for tax purposes
  $ 23,976 
Unrealized gain on investments
    100,537 
Total deferred tax liabilities
  $  124,333 




 
8

 

The effective tax rate as of December 31, 2013 was 39.8%; 34.0% U.S. statutory federal income tax rate and 5.8% California state tax, net of US federal income tax benefit. Offering costs amortizing into the statement of operations are not considered deductible for income tax purposes and result in the effective tax rate on reported financial statement income to be larger than would otherwise be expected.

Per Share Information: Net increase or decrease in net assets resulting from operations per common share is calculated using the weighted average number of common shares outstanding for the periods presented.

Subsequent Events: Subsequent events are events or transactions that occur after the date of the statements of assets and liabilities but before the date the financial statements are available to be issued. Subsequent events that provide additional evidence about conditions that existed at the date of the statement of assets and liabilities are considered in the preparation of the financial statements presented herein. Subsequent events that occur after the date of the statement of assets and liabilities that do not provide evidence about the conditions that existed as of the date of the statement of net assets are considered for disclosure based upon their significance in relation to the Company’s 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. The Company believes that the carrying amounts of its financial instruments, consisting of cash, accounts receivable from affiliates, interest payable to affiliates and other accrued expenses and liabilities approximate the fair values of such items.

Valuation of Investments: The Company’s financial statements include investments that are measured at their estimated fair values in accordance with GAAP. A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. The Company develops fair values for investments based on available inputs which could include pricing that is observed in the marketplace.

Examples of market information that the Company attempts to obtain include the following:
 
Recent quoted trading prices for the same or similar securities;
Recent purchase prices paid for the same or similar securities;
Recent sale prices received for the same or similar securities;
Relevant reports issued by industry analysts and publications; and
Other relevant observable and unobservable inputs, including liquidity discounts.

After considering all available indications of the appropriate rate of return that market participants would require, the Company considers the reasonableness of the range indicated by the results to determine an estimate that, in its opinion, is most representative of fair value.

The markets for many of the real estate securities in which the Company invests are generally illiquid. Establishing fair values for illiquid investments is inherently subjective and is often dependent upon significant estimates and modeling assumptions. If either the volume and/or level of trading activity for an investment has significantly changed from normal market conditions, or price quotations or observable inputs are not associated with orderly transactions, the market inputs used might not be relevant. For example, recent quoted trading prices might not be relevant if a ready market does not exist for the quantity of investments that the Company may wish to sell.

In circumstances where relevant market inputs cannot be obtained, increased analysis and management judgment are required to estimate fair value. This generally requires the Company to establish the use of internal assumptions about future cash flows, including the cash flows of underlying real property, and appropriate risk-adjusted discount rates. Regardless of the valuation inputs used, the objective of fair value measurement is unchanged from what it would be if markets were operating at normal activity levels and/or transactions were orderly; that is, to determine the current exit price.

The Company is under no compulsion to dispose of its investments, and expects to hold them for a substantial period of time. Therefore, estimated values as determined above may not reflect amounts that could be realized upon actual sale at a future date.

Revenue Recognition:  Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the investment. Investments are disposed of on a first-in, first-out basis unless otherwise specifically identified.

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

Dividends and Distributions: Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a quarterly dividend or distribution is approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our earnings for the quarter.

NOTE 3 –INVESTMENTS

The following table summarizes the composition of the Company’s investments at cost and fair value as of June 30, 2013 and December 31, 2013:
 
 
June 30, 2013
   
December 31, 2013
 
Asset Type
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Public REIT
  $ 1,062,727      $ 1,032,257      $ 1,925,233      $ 2,003,113   
Non-traded REIT
    88,291        71,637        99,622        109,873   
LP Interest
    4,143,699        4,334,345        3,036,865        3,171,789   
Investment Trust
    1,190,927        1,167,469        1,192,162        1,231,495   
Note
    250,000        250,000        468,615        458,615   
Total
  $ 6,735,644      $ 6,855,708      $ 6,722,497      $ 6,974,885   
 
                               


 
9

 


Fair Value Measurements

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

Investments measured and reported at fair value are classified and disclosed in one of the following categories:
 
  Level I – Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities. The Company does not adjust the quoted price for these investments even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
  Level II – Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.
  Level III – Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The following table summarizes the valuation of the Company’s investments as of December 31, 2013:
 
Asset Type
 
Total
   
Level I
   
Level II
   
Level III
 
Public REIT
  $ 2,003,113      $ 1,934,913      $ 68,200      $  
Non-traded REIT
    109,873                    109,873   
LP Interest
    3,171,789                    3,171,789   
Investment Trust
    1,231,495                    1,231,495   
Note
    458,615                    458,615   
Total
  $ 6,974,885      $ 1,934,913      $ 68,200      $ 4,971,772   

The following table summarizes the valuation of the Company’s investments as of June 30, 2013:

 
Asset Type
 
Total
   
Level I
   
Level II
   
Level III
 
Public REIT
  $ 1,032,257      $ 1,032,257      $
-  
    $  
Non-traded REIT
   
71,637 
                 
71,637 
 
LP Interest
   
4,334,345 
                 
4,334,345 
   
Investment Trust
   
1,167,469 
                 
1,167,469 
 
Note
   
250,000 
              -       
250,000 
 
Total
  $ 6,855,708      $ 1,032,257      $
    $ 5,823,451   


 
10

 


The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period ended December 31, 2013:

Balance at July 1, 2013
  $ 5,823,451   
Purchases of investments
    312,854   
Proceeds from sales, net
    (1,372,368)   
Return of capital
    (185,730)   
Net realized gain on sale of investments
    369,594   
Net unrealized gain
    23,971   
Ending balance at December 31, 2013
  $ 4,971,772   
 
       
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period ended June 30, 2013:

Balance at July 1, 2012
  $  
Purchases of investments
    5,674,404   
Proceeds from sales
    (254)   
Net realized loss on sale of investments
    (1,234)   
Net unrealized gain
    150,535   
Ending balance at June 30, 2013
  $ 5,823,451   
 
For the six months ended December 31, 2013 and 2012, changes in unrealized gain included in earnings relating to level III investments still held at December 31, 2013 and 2012 were $227,056 and $0, respectively.

The level II investments with total fair value of $68,200 included investments in thinly-traded public REITs which were valued using the ten day average trading prices of their stock.


 
11

 

The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at December 31, 2013:

Asset Type
 
Fair Value
 
Primary Valuation
      Techniques
Unobservable Inputs Used (1)
Range
Wt. Average
 
 
 
 
 
 
 
 
Non-traded REIT
$
 109,873 
 
Market Activity
Contracted security purchase price
   
 
 
 
 
 
Secondary market industry publication
   
 
 
 
 
 
 
   
LP Interest
 
119,670 
 
Discounted Cash Flow
Discount rate
22% - 24%
22%
 
 
 
 
 
Liquidity discount
45%
 
 
 
 
 
 
Sponsor provided value
   
LP Interest
 
2,392,084 
 
Market Activity
Secondary market industry publication
   
 
 
 
 
 
Contracted security purchase price
   
 
 
 
 
 
Contracted sale of security/property
   
 
 
 
 
 
Comparable sales reports
   
LP Interest
 
660,035 
 
Net Asset Value
Capitalization rate
7.96% - 11%
8%
 
 
 
 
 
Liquidity discount
40%
 
 
 
 
 
 
Per room key
$277,278 - $313,830
$299,391
 
 
 
 
 
 
   
Investment Trust
 
675,186 
 
Market Activity
Secondary market industry publication
   
 
 
 
 
 
Contracted security purchase price
   
Investment Trust
 
556,309 
 
Net Asset Value
Comparable sales reports
   
 
 
 
 
 
Capitalization Rate
7%
 
 
 
 
 
 
 
   
Note
 
458,615 
 
Market Activity
Contracted security purchase price
   
 
 
 
 
Discounted Cash Flow
Discount rate
8.0%
 
 
$
4,971,772 
 
 
     

Valuation Technique Terms:
(1)All investment valuations generally contain a liquidity discount of 31.5% except as noted above.


 
12

 


The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2013:
 
Asset Type
Fair Value
 
Primary Valuation
      Techniques
Unobservable Inputs Used (1)
Range
Wt. Average
 
 
 
 
 
 
 
Non-traded REIT
$ 12,123   
Market Activity
Secondary market industry publication
 
 
Non-traded REIT
  59,514   
Combination
Sponsor provided value, secondary market bid
 
 
 
     
 
 
 
 
LP Interest
  107,221   
Discounted Cash Flow
Internal Rate of Return
22% - 26% 22%
 
     
 
Term
6 months
6 months
LP Interest
  2,719,163   
Market Activity
Secondary market industry publication
   
 
     
 
Acquisition cost
   
 
     
 
Contracted sale of security
   
 
     
 
Contracted sale of property
   
LP Interest
  1,507,961   
Net Asset Value
Capitalization rate
6% - 10% 8%
 
     
 
Appraisal and merger price
   
 
     
 
Sponsor provided value
   
 
     
 
Comparable sales reports
   
 
     
 
 
   
Investment Trust
  679,439   
Market Activity
Secondary market industry publication
   
Investment Trust
  414,987   
Net Asset Value
Comparable sales reports
   
Investment Trust
  73,043   
Direct Capitalization method
Capitalization rate
7% 7%
 
     
 
 
   
Note
  250,000   
Discounted Cash Flow
Discount rate
8%  
 
     
 
 
   
 
$ 5,823,451   
 
 
   
 
     
 
 
   
Valuation Technique Terms:
(1)All investment valuations generally contain a liquidity discount of 33% except as noted above.

NOTE 4 –RELATED PARTY TRANSACTIONS

Investment Advisory Agreement:

The Company entered an investment advisory agreement with the Adviser.  Under the Investment Advisory Agreement, the Company will pay the Adviser a fee for its services consisting of three components — a portfolio structuring fee, a base management fee and a subordinated incentive fee.

The portfolio structuring fee is for the Adviser’s initial work performed in connection with the acquisition of all the Company’s assets and equals 3.5% of the gross proceeds from the sale of the Company’s shares.

The base management fee is calculated based on the Company’s “managed funds,” which are the value of the Company’s shares plus any borrowing for investment purposes.  The base management fee will range from 1.5% to 3.0%, depending on the level of the “managed funds.”

The subordinated incentive fee has three parts—income, capital gains and liquidation. The income component is (i) 100% of the Company’s preliminary net investment income for any calendar quarter that exceeds 1.75% (7% annualized) but is less than 2.1875% (8.75% annualized) of the Company’s “contributed capital;” (which is defined as the number of Shares outstanding, multiplied by the price at which the Shares are sold), and (ii) 20% of the Company’s preliminary net investment income for any calendar quarter that exceeds 2.1875% (8.75% annualized) of the Company’s “contributed capital.”  The capital gains component is (i) 100% of the Company’s realized capital gains annually generated by its investments above 7% and up to 8.75% of the Company’s “contributed capital,” and (ii) 20% of the Company’s realized capital gains above 8.75% of the Company’s “contributed capital,” all computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.  The capital gains component may not in any event exceed 20% of the Company’s realized capital gains, net of all realized capital losses and unrealized capital depreciation.  The liquidation component will be 20% of the amount by which all distributions to stockholders exceed the “contributed capital,” less all previously- paid capital gains fees, provided that the liquidation component may not exceed 20% of all of the Company’s realized capital gains as of the date of liquidation.

The base management fees for the three and six months ended December 31, 2013 were $54,616 and $109,233, respectively, and were recorded as investment advisory fees on the statements of operations and due to related entities in the statements of assets and liabilities. There were no base management fees incurred for the three and six months ended December 31, 2012.
 
There were no portfolio structuring fee and subordinated incentive fees incurred from the inception through December 31, 2013.
 
 
13

 
 

Organization and Offering Costs Reimbursement:

As provided in the Investment Advisory Agreement, organization and offering costs incurred and paid by the Company in excess of $550,000 will be reimbursed by the Adviser. As of December 31, 2013 and June 30, 2013, the Company had incurred $769,486 and $617,627 of organization and offering costs, respectively. Thus, according to the agreement, $219,486 and $67,627 of the amount were reimbursable from the Adviser as of December 31, 2013 and June 30, 2013, respectively. As of December 31, 2013 the Adviser has reimbursed the Company in the amount of $201,023 and the remaining reimbursable amount of $18,463 was offset against the amount of $54,616 payable to the Adviser as of December 31, 2013.

Administration Agreement:

The Company entered into an administration agreement with MacKenzie.  Under this agreement, the Company reimburses MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing the Company with other administrative services, subject to the Independent Directors’ approval. In addition, the Company will reimburse MacKenzie for the fees and expenses associated with performing compliance functions, and allocable portion of the compensation of the Company’s Chief Financial Officer, Chief Compliance Officer, Financial Reporting Manager, and any administrative support staff.

The administrative cost reimbursements for the three and six months ended of December 31, 2013 were $12,000 and $36,000, respectively. The Company did not incur any administrative costs reimbursable to MacKenzie for the three and six months ended December, 31, 2012.

Investments:
 
Coastal Realty Business Trust (“CRBT”): CRBT is a Nevada business trust whose trustee is MacKenzie and whose beneficiaries are the Company and various private funds managed by MacKenzie. Its purpose is to own various investments on behalf of such funds. Each CRBT Trust Series (“Series”) pools capital from several funds managed by MacKenzie and invests (generally) in shares of private REITs as provided for in the Trust Agreement. Each Series participant is limited by the terms of the agreement and, as such, an interest in a Series has no redemption rights.

 
The Company has a 16.46% interest in CRBT, REEP, which owns a beneficial interest in a non-managing general partnership interest in Secured Income, LP.
 
The Company has a 16.46% interest in CRBT, Secured Income, which owns a beneficial interest in Secured Income, LP.
 
The Company has a 7.52% interest in CRBT, Series F2, which acquires and manages a real estate portfolio consisting mainly of office properties located in the United States.
 
The Company has a 55.77% interest in CRBT, Series H2, which invests in shares of a REIT that owns a real estate portfolio totaling 170 properties located in the United States and Canada. These properties include senior housing, hotels and resorts, golf courses, and marinas, among others.
 
The Company has a 7.94% interest in CRBT, Series L2, which invests in shares of a REIT that acquires and manages a diversified real estate portfolio, primarily comprised of retail, office, hotel, multi-family, and industrial properties.
 
The Company has a 5.27% interest in CRBT, Series Q, which invests in units of a limited partnership formed for the purpose of acquiring, refurbishing, and operating the Prescott Hotel and Postrio Restaurant located near Union Square in San Francisco, California.

MPF Pacific Gateway: The Company has a 15.82% interest in MPF Pacific Gateway, which is a holding company that owns an investment in a REIT Liquidating Trust. MPF Pacific Gateway is managed by MacKenzie.
 


 
14

 


NOTE 5 – FINANCIAL HIGHLIGHTS
 
The following is a schedule of financial highlights of the Company for the six months ended December 31, 2013 and the year ended June 30, 2013.

 
 
Six Months ended
   
Year Ended
 
 
 
December 31, 2013
   
June 30, 2013
 
Per Share Data:
 
 
   
 
 
 
Beginning net asset value
  $ 10.02      $ 8.53   
 
               
Net investment loss (1)
    (0.41)        (0.41)   
Net realized gain on sale of investments (1)
    0.56        0.21   
Net unrealized gain on investments (1)
    0.18        0.44   
Income tax provision
    (0.24)         
Net increase in net assets resulting from operations
    0.09        0.24   
 
               
Issuance of common stock above net asset value
          1.25   
Ending net asset value
  $ 10.11      $ 10.02   
 
               
Weighted average common shares outstanding
    728,217        269,268   
Shares outstanding at the end of period
    728,217        728,217   
Net assets at the end of period
  $ 7,365,527      $ 7,293,932   
Average net assets (2)
  $ 7,329,730      $ 3,789,098   
 
               
Ratios to average net assets
               
Total expenses (4)
    6.09  %     5.00  %
Net investment loss (4)
    (4.06)  %     (2.94)   %
Total rate of return (2) (3)
    0.98   %     1.71  %
 
 
(1)
Based on weighted average number of shares of common stock outstanding for the period.
(2)
Average net assets were derived from the beginning and ending period-end net assets.
(3)
Total return is calculated based upon the change in value of the net assets. An individual shareholder’s return may vary from this return based on the time of capital transactions.
(4)
Not annualized for the six months ended December 31, 2013.


 
15

 


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

Statements by MacKenzie Realty Capital, Inc. (the “Fund,” ”we,” or “us,”) contained herein, other than historical facts, may constitute “forward-looking statements.”  These statements may relate to, among other things, future events or our future performance or financial condition.  In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” ”could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in our Registration Statement filed on Form N-2.

We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions.  As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Overview

We have elected to be regulated as a business development company (“BDC”) and we are classified as a non-diversified closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).  We also intend to elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”) as soon as we are able to so qualify, which we believe will be begin with our tax year ending December 31, 2014.   As a BDC we are subject to numerous regulations and restrictions.

We were formed to continue and expand the business of our portfolio of assets we acquired from eight private funds, which we refer to as our “Legacy Funds,” and which are managed by an affiliate of our investment adviser. The portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million on February 28, 2013, including approximately $6.45 million of debt and equity investments issued by 47 portfolio companies (the “Legacy Portfolio”). As consideration for our acquisition of that portfolio, 692,217 shares of our common stock (“Shares”) were issued to the Legacy Funds.   We intend to invest primarily in debt and equity real estate-related securities with the receipt of proceeds from our initial public offering which we are commencing at this time (the “IPO”).
 
Beginning with our tax year ending December 31, 2014, the Company intends to operate in a manner that will allow the Company to qualify and elect to be taxed as a REIT for federal income tax purposes and, accordingly, will not be subject to federal income taxes on amounts that the Company distributes to its stockholders, provided that, on an annual basis, the Company distributes 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. However, the REIT election has not yet been made; as such, our net increase in net assets resulting from operations is currently taxed at regular corporate tax rates for both federal and state income tax purposes.
 
Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of June 30, 2013 and December 31, 2013:
 
     
               June 30, 2013
     
December 31, 2013
   
Asset Type    
   Cost   
   
Fair Value
     
Cost   
   
Fair Value
   
Public REIT
  $ 1,062,727    $ 1,032,257      $ 1,925,233    $ 2,003,113     
Non-traded REIT
    88,291      71,637        99,622      109,873     
LP Interest
    4,143,699      4,334,345        3,036,865      3,171,789     
Investment Trust
    1,190,927      1,167,469        1,192,162      1,231,495     
Note
    250,000      250,000        468,615      458,615     
Total
  $ 6,735,644    $ 6,855,708      $ 6,722,497    $ 6,974,885     
 
Net Asset Value
 
Our net asset value as of December 31, 2013 reported on a GAAP basis was $10.11 per share, as compared to $10.02 per share at June 30, 2013, a $0.09 per share increase of approximately 0.9%. However, management recognizes that the GAAP basis net asset value per share includes deferred offering costs and a deferred tax liability neither of which, in the opinion of management, are reflective of actual value. Deferred offering costs have zero realizable and liquidation value and are expensed over one year period beginning August 1, 2013.  And, the deferred tax liability, as discussed in note 2 of the financial statements, is not expected to be paid but rather is expected to be reversed upon the Company’s anticipated election as a REIT which is contemplated to be completed in the tax year ending December 31, 2014.  Thus, management has also calculated the non-GAAP adjusted net asset value per share of common stock, which is reduced by  deferred offering costs and increased by deferred tax liability as of December 31, 2013 and June 30, 2013, in the amounts of $9.94 and $9.43 per share, respectively.  The increase of $0.51 per share, for the non-GAAP net asset value was due to net realized gain on the sale of investments per share of $0.56 and net unrealized gain on investments of $0.18 per share offset by $0.16 of net investment loss
 
16

 
 
per share net of amortization of deferred offering costs of $0.25 per share and income tax provision of $0.07, net of deferred tax liability of $0.17 per share.
 
Reconciliation of GAAP and non-GAAP basis net asset value per share:

 
 
December 31, 2013
   
June 30, 2013
 
 
 
 
   
 
 
GAAP basis net asset value per share
  $ 10.11      $ 10.02   
 
               
Deferred offering costs (net of accumulated amortization) per share
    (0.34)        (0.59)   
                 
Deferred tax liability per share
    0.17         
 
               
Non-GAAP net asset value (net of Deferred offering cost and Deferred tax liability) per share
  $ 9.94      $ 9.43   
 
Investment Plan

We commenced our operations on February 28, 2013 with the acquisition of the Legacy Portfolio.  Our investments are generally expected to range in size from $10 thousand to $3 million, similar to the investments in the Legacy Portfolio. However, we may make larger investments from time to time on an opportunistic basis. We intend to focus primarily on real estate-related securities.  We will purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers.  We will invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.

Distributions from Investments

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

Three Months Ended December 31, 2013 and 2012:

Income:  Total investment income during the three months ended December 31, 2013 and 2012 was $94,296 and $0, respectively.  Investment income was primarily made up of dividend, distribution and interest income.  We had no investment activity before February 28, 2013.

Expenses:  Total expenses for the three months ended December 31, 2013 and 2012 were $214,150 and $13,140, respectively.  This net increase of $201,010 or 1,530% was the result of the commencement of operations, preparing for the IPO, and general and administrative expenses related to ongoing operating costs such as investment advisory fees, administrative cost reimbursements, amortization of deferred offering cost, board meetings, accounting fees, insurance and supplies.

Net realized gain on investments: Total realized gain on investments for the three months ended December 31, 2013 and 2012 were $410,262 and $0, respectively. The increase in realized gain on investments was due to higher investment activities during 2013. We did not own any securities prior to February 28, 2013. Net gain realized on investments during the three months ended December 31, 2013 was primarily attributed to investments sales, liquidation and exchange of private limited partnership investments for shares of a newly-registered public REIT during the quarter ended December 31, 2013. Of the total net realized gain for the quarter ended December 31, 2013, $39,816 was realized through sales of Public REIT investments, $143,147 was realized through sales and liquidation of limited partnership investments and $227,299 was realized through an exchange of three limited partnership investments for shares of a newly-registered public REIT.

Net unrealized gain on investments: Total unrealized gain on investments for the three months ended December 31, 2013 and 2012, was $48,249 and $0, respectively. The increase was due to an increase in the fair value of the investment portfolio during the three months ended December 31, 2013. We did not own any securities prior to February 28, 2013.


 
 
 
17

 
 
Six Months Ended December 31, 2013 and 2012:
 
Income:  Total investment income during the six months ended December 31, 2013 and 2012 were $148,773 and $0, respectively.  Investment income was primarily made up of dividend, distribution and interest income.  We had no investment activity before February 28, 2013.

Expenses:  Total expenses for the six months ended December 31, 2013 and 2012 were $446,528 and $17,599, respectively.  This net increase of $428,929 or 2,437% was the result of the commencement of operations, preparing for the IPO, and general and administrative expenses related to ongoing operating costs such as investment advisory fees, administrative cost reimbursements, amortization of deferred offering cost, board meetings, accounting fees, insurance and supplies.

Net realized gain on investments: Total realized gain on investments for the six months ended December 31, 2013 and 2012 were $409,410 and $0, respectively. The increase in realized gain on investments was due to higher investment activities during 2013. We did not own any securities prior to February 28, 2013. Substantially all of the net realized gain on investments for the six months ended December 31, 2013 was realized during the three months ended December 31, 2013 as discussed above under net realized gain on investments for the three months ended December 31, 2013.

Net unrealized gain on investments: Total unrealized gain on investments for the six months ended December 31, 2013 and 2012 were $132,324 and $0, respectively. The increase was due to an increase in the fair value of the investment portfolio during the six months ended December 31, 2013. We did not own any securities prior to February 28, 2013.

Liquidity and Capital Resources

We are currently in the process of raising capital through the IPO and during the period of January 1, 2014 through February 14, 2014, we have raised capital in the amount of $158,000.  We do not have any plans to issue any preferred equity.  We will generate cash from the net proceeds of the IPO and any future offerings of securities and cash flows from operations, including earnings on investments in the Legacy Portfolio and future investments, as well as interest earned from the temporary investment of cash in U.S. Government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities.  After our initial closing in the IPO, we will sell our shares on a continuous basis at a price of $10; however, if our NAV per share increases above $10 per share, we will sell our shares at a higher price as necessary to ensure that shares are not sold at a price which, after deduction of selling commissions and dealer manager fees, is below our NAV per share, unless we have operative stockholder approval to sell shares below NAV.  We have obtained stockholder approval to sell below NAV at a special meeting of stockholders held on September 13, 2013.  In connection with each closing on the sale of shares in the IPO, our Board of Directors or a committee thereof is required to make the determination within 48 hours of the time that we price our shares for sale that we are not selling our common stock at a price below our then current NAV, unless we have operative stockholder approval to sell shares below NAV.
 
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly.  The maximum amount of such borrowing is limited by the 1940 Act.

Our primary use of funds will be investments in portfolio companies, cash distributions to holders of our common stock (primarily from investment income and realized capital gains), payments to any lenders or senior security holders, and the payment of operating expenses.  Immediately after the IPO and depending on its size, we expect to have cash resources of approximately $43.4 million.

Contractual Obligations

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

Off-Balance Sheet Arrangements

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

 
18

 
 
Borrowings

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

Critical Accounting Policies

The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions.  Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments.

Valuation of Portfolio Investments

We will determine the NAV of our investment portfolio each quarter (and as of each bi-monthly closing when our IPO continues) by subtracting our total liabilities from the fair value of our gross assets.  We will conduct the valuation of our assets and determine our NAV consistent with GAAP and the 1940 Act, and report our NAV in our periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “1934 Act”).
 
We report our investments at fair value and in order to determine the fair value of investments, we follow the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
 
Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may also use published secondary market trading information for securities that do not trade on a national exchange in order to value assets. When doing so, we determine whether the trading price obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the trading price obtained.
 
Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or our Board of Directors, does not represent fair value, which we expect will represent a substantial majority of the investments in our portfolio, will each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third-party valuation firms.
 
The recommendation of fair value will generally be based on the following factors, as relevant:
 
 
·
the nature and realizable value of any collateral;
 
 
·
the portfolio company’s ability to make payments;
 
 
·
the portfolio company’s earnings and discounted cash flow;
 
 
·
the markets in which the issuer does business; and
 
 
·
comparisons to publicly traded securities.
 
Securities for which market data are not readily available or for which a pricing source is not sufficient may include the following:
 
 
·
private placements and restricted securities that do not have an active trading market;
 
 
·
securities whose trading has been suspended or for which market quotes are no longer available;
 
 
·
debt securities that have recently gone into default and for which there is no current market;
 
 
·
securities whose prices are stale;
 
 
·
securities affected by significant events; and
 
 
·
securities that the Investment Adviser believes were priced incorrectly.
 
 
 
 
 
19

 
 
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
 
The preparation of financial statements in conformity with GAAP requires management to estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Distributions to Stockholders

To the extent that we have cash available, we intend to distribute quarterly dividends to our stockholders, beginning with our first full quarter after the first closing of sales pursuant to the IPO. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our shares. Any dividends to our stockholders will be declared out of assets legally available for distribution.  In no event are we permitted to borrow money to make distributions if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.
 
We are currently taxed at a regular corporate tax rate for both federal and state income tax purposes; however, we expect to elect to be taxed, and intend to qualify annually commencing with our tax year ending December 31, 2014 and thereafter, as a REIT under the Code when we become eligible to make that election. If we elect to be treated as a REIT, we will be required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income.  We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
Our current intention is to make any distributions in additional shares under our dividend reinvestment plan (“DRIP”) out of assets legally available therefore, unless a stockholder elects to receive dividends and/or long-term capital gains distributions in cash, or participation in the DRIP is restricted by a state securities regulator.
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
The Legacy Portfolio, as well as our future investments, will primarily consist of equity and debt securities issued by smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments in these securities are considered speculative in nature. Our investments do and will often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and return of capital.
 
Financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented  85% of our total assets at December 31, 2013.  As discussed in Note 3 to our financials statement (“Investments”), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy represents a high degree of business and financial risk due to the fact that portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.

Item 4.
CONTROLS AND PROCEDURES
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act.  Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 
20

 
 

 
PART II—OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
 
None.
 
Item 1.A.
RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in our registration statement on Form N-2 and Form 10K for the fiscal year ended June 30, 2013, which could materially affect our business, financial condition or operating results.  The risks described in our registration statement on Form N-2 are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On February 28, 2013, we acquired the Legacy Portfolio.  As consideration for the acquisition of that portfolio, 692,217 Shares were issued to the Legacy Funds (the “Legacy Portfolio Acquisition”).  The portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million as of February 28, 2013.  Each Legacy Fund received a portion of the 692,217 shares issued in connection with the Legacy Portfolio Acquisition.

The common stock issued to the Legacy Funds was issued under the registration exemption provided for in Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”).  With respect to these exemptions, neither we, nor any person acting on our behalf, offered or sold the securities by means of any form of general solicitation or advertising.  Prior to making any offer or sale in connection with the Legacy Portfolio Acquisition, we had reasonable grounds to believe and believed that each Legacy Fund (i) was capable of evaluating the merits and risks of the investment, (ii) was able to bear the economic risk of the investment, (iii) was provided with the opportunity to ask questions of our management respecting our business plans and finances,  (iv) received access to all material company contracts and agreements, and (v) possessed the requisite experience in business and financial matters to enable them to appreciate the risks of investing in the common stock.  Each Legacy Fund represented in writing that the common stock purchased was being acquired for investment for such purchaser’s own account, and agreed that the stock would not be sold, without registration under the 1933 Act or exemption from the 1933 Act.  Each Legacy Fund understood that the shares were not registered under the 1933 Act and the restrictions on their transferability.

Item 3.
DEFAULTS UPON SENIOR SECURITIES
 
None
 
Item 4.
MINE SAFETY DISCLOSURES

None
 
Item 5.
OTHER INFORMATION

None





 
21

 

 
 
Item 6.
EXHIBITS
 
 
Exhibit
 
Description
 
 
 
 
   
31.1
Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
 
     
31.2
Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
 
     
32.1
Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
 
     
32.2
Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
 


 
 
 
 
 

 
22

 

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
    MACKENZIE REALTY CAPITAL, INC.  
 
 Date:    February 14, 2014 By: /s/ Robert Dixon  
       
       
Date:     February 14, 2014  By: /s/ Paul Koslosky  
       
 
 



 
23

 

EXHIBIT INDEX
 
 
 
 
Exhibit
 
Description
 
 
 
 
   
31.1
Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
 
     
31.2
Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
 
     
32.1
Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
 
     
32.2
Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
 


 
 
 
 
 
24