Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements by MacKenzie Realty Capital, Inc., its wholly owned subsidiary MRC TRS, Inc. and, its majority owned subsidiaries; MacKenzie Realty Operating Partnership, LP,
Madison-PVT Partners LLC and PVT-Madison Partners LLC (the “Company,” “we,” or “us”) contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or
our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,”
“should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements, including an economic
downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; a contraction of available credit and/or an inability to access the equity
markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could
cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in our Annual Report on Form 10-K.
We may experience fluctuations in our operating results due to a number of factors, including the effect of the withdraw 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 Real Estate Adviser and the Investment Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Authorization to Withdraw BDC Election
On October 23, 2020, holders of a majority of the outstanding common stock of the Company approved the authorization of the Company’s Board of Directors to withdraw the Company’s election to be
regulated as a BDC under the Investment Company Act of 1940. The Company submitted the withdrawal to be effective with the SEC on December 31, 2020.
Withdrawal of our election to be regulated as a BDC does not affect our registration under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”), and we continue to file
periodic reports on Form 10-K, Form 10-Q, and Form 8-K, and file proxy statements and other reports required under the Exchange Act. As a result of the withdrawal of our election to be regulated as a BDC, we are no longer be treated as an
investment company for purposes of applying U.S. GAAP, which results in a significant change in our future financial statement presentation. The most notable changes to the format of our financial statements include the removal of the Schedule of
Investments and Financial Highlights and consolidation of majority owned subsidiaries. Exclusive of the Operating Partnership, we expect our other equity investments, both public and private, to continue to be reported at fair value within our
financial statements under provisions of GAAP. We intend to, where appropriate, provide supplemental non-GAAP information in order to enhance our investors’ overall understanding of our financial statements.
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The Company undertook several steps to meet the requirements for withdrawal of its election to be regulated as a BDC, including (i) preparing a plan of operations in contemplation of such a
change to the status of the Company, (ii) evaluating potential investments in real estate assets that will allow the Company to transition to direct real estate asset investments, (iii) reviewing the potential adjusted investment strategy with
potential capital providers, and (iv) consulting with outside counsel as to the requirements for withdrawing its election as a BDC.
During this transition period, the Company may liquidate some of its securities portfolio. By the end of the first year after withdrawal of its election, the Company anticipates that its
securities portfolio will comprise less than 20% of its assets.
Investment Plan
Now that we are no longer a BDC, we generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up
to 20% of our total assets in 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 debt and equity real estate-related investments. Our independent directors review our investment policies
periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings.
We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate
securities at significant discounts to their net asset value.
We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as
necessary to extract unrealized value.
We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and
experience of the Adviser’s investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from
what the Adviser estimates to be the actual or potential value of the real estate.
The Company’s investment strategies since its inception have included making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing,
tenant improvements or other cash needs. Since entering the current recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in some cases, we have provided additional capital to the extent that we now own
the majority of the project (such as Addison Corporate Center). In such cases, we intend to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status.
The Company intends to continue its historical activities related to tender offers for shares of non-traded REITs in order to boost its short-term cash flow and to support its dividends, subject
to the constraint that such securities will not exceed 20% of our portfolio. The Company believes this niche strategy will allow it to pay dividends 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.
Investment income
We generate revenues in the form of 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.
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Expenses
Our primary operating expenses include the payment of: (i) advisory fees to our Advisers; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its
obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment and Real Estate Adviser for its work in identifying, evaluating, negotiating, closing,
monitoring and servicing our investments. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other
expenses of our operations and transactions, including:
•
the cost of operating and maintaining real estate properties
•
the cost of calculating our NAV;
•
the cost of effecting sales and repurchases of our shares and other securities;
•
interest payable on debt, if any, to finance our investments;
•
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party
advisory fees;
•
transfer agent and safekeeping fees;
•
fees and expenses associated with marketing efforts;
•
federal and state registration fees, and any stock exchange listing fees in the future;
•
federal, state, and local taxes, if any;
•
independent directors’ fees and expenses;
•
brokerage commissions;
•
fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums;
•
direct costs and expenses of administration, including printing, mailing, and staff;
•
fees and expenses associated with independent audits and outside legal costs;
•
costs associated with our reporting and compliance obligations under the 1934 Act, and applicable federal and state securities laws; and
•
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of
overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the
costs of compensation and related expenses of our Chief Compliance Officer, our Chief Financial Officer, Director of Accounting and Financial Reporting, General Counsel, and any administrative support staff.
Portfolio Investment Composition
As of March 31, 2021, we primarily owned equity securities in various real estate limited partnerships and REITs. As a result of the change in the Company’s status and applying the new basis of
accounting, on the effective date of the termination of the Company’s status as a BDC, the Company recorded the fair of the investments as the new carrying value of the investments. The following table summarizes the composition of our equity
method investments with fair value option election as well as other equity investments at fair value as of March 31, 2021:
Asset Type
Fair Value
March 31, 2021
Publicly Traded Companies
$
193,640
Non Traded Companies
28,642,045
Non Traded Company (Equity method investment with fair value option election)
2,844,041
LP Interests
319,312
LP Interests (Equity method investment with fair value option election)
44,638,034
Investment Trust
33,990
Total
$
76,671,062
In addition to our investment securities, we currently own and manage one commercial real estate property (Addison Corporate Center) located in Windsor, CT and two residential apartments:
Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA. The Addison Corporate Center is owned through our subsidiary, the Operating Partnership, the Commodore Apartments is owned through our subsidiary Madison-PVT Partners LLC
(“Madison”), and the Pon De Leo Apartments is owned through our subsidiary PVT-Madison Partners LLC (“PVT”).
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The Addison Corporate center contains 605,392 square feet, of which approximately 185,000 square feet is office space and the remainder is designated as flex office/warehouse space. As of March
31, 2021, the property is approximately 59% occupied by 6 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants
Square Ft. Occupied
Sun Life
100,623
Triumph
88,255
Belcan
84,295
Quest Diagnostics
65,459
The Commodore Apartments is a mid-rise apartments built in 1912 and has 48 units. As of March 31, 2020, the apartment is approximately 95.8% occupied. The Pon De Leo Apartments is also a mid-rise
apartments built in 1929 and has 39 units. As of March 31, 2020, the apartment is approximately 94.9% occupied.
The following table summarizes the composition of our investments at cost and fair value as of June 30, 2020:
June 30, 2020
Asset Type
Cost
Fair Value
Publicly Traded Companies
$
8,454,348
$
7,244,654
Non Traded Companies
42,474,614
32,808,076
LP Interests
53,713,785
53,618,425
Investment Trust
49,901
33,990
Total
$
104,692,648
$
93,705,145
Results of Operations
COVID-19 pandemic
Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level.
However, measures taken to limit the impact of the COVID-19 pandemic, including social distancing and other restrictions on travel, congregation, and business operations have already resulted in significant negative economic impacts, including
steep declines in certain stock market segments and in the traded prices for certain real-estate related assets. As a result of these impacts, we have experienced a large decrease in fair values of some of our investments as of March 31,
2021. In addition, some of the companies in which we have invested have cancelled their quarterly dividends and distributions for the current and future quarters. The long-term impact of the COVID-19 pandemic on the United States and world
economies remains uncertain, but may result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted.
MacKenzie and our Advisers have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. They implemented business continuity plans and the management team is in place to
respond to changes in the global environment quickly and effectively. To protect the health and safety of their team members, they successfully transitioned almost their entire workforce to remote work environments. They are working closely with
our clients to support them as necessary and as seamlessly as possible.
The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response and assessing potential impacts to our financial position and operating results. This includes the evaluation
and implementation of certain efforts to help us mitigate the impact that reduced revenues from distributions and capital events may have on our 2020 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 discontinued dividends starting March 2020 and share redemptions
starting May 2020 .
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Due to the termination of the Company’s BDC status effective December 31, 2020, during the current fiscal year, the Company operated as a BDC for the period of July 1 through December 31, 2020 and as an operating
REIT for the period of January 1, 2021 through March 31, 2021. Therefore, the current fiscal year-to-date operating activities have been reported in two different periods; three months ended March 31, 2021 and six months ended December 31, 2020 and
those periods have been compared to the same prior year periods.
Three Months Ended March 31, 2021 and 2020
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from the Company’s one commercial real estate property and two residential apartments. During the three months ended March 31, 2021, the Company
generated $1.76 million in rental and reimbursements revenues, of which $1.62 million was generated from the Addison Corporate Center tenants and $0.15 million from the residential Apartments. The Company acquired the two residential apartments on
March 5, 2021; thus, they only generated one month of rental revenues. There were no rental revenues during the three months ended March 30, 2020 as the Company did not own any real estate properties.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the
three months ended March 31, 2021 and 2020 was $1.04 million and $3.09 million respectively. The decrease of $2.06 million or 66.55%, was primarily due to suspensions of dividends and distributions from our investments as a result of the COVID-19
pandemic. During the three months ended March 31, 2021, the Company received $0.54 million of distributions from operations, sales and liquidations as compared to $2.64 million during the three months ended March 31, 2020. During the three months
ended March 31, 2021, we received dividends, interest, and other investment income of $0.49 million as compared to $0.45 million during the three months ended March 31, 2020. The decrease in investment income is also due to decrease in our
investment portfolio since March 31, 2020. As of March 31, 2021 the Company has investments with total cost basis of $75.51 million as compared to $99.43 million as of March 31, 2020.
Operating Expenses:
The Company’s following base management, portfolio structuring and subordinated incentive fees were based on the investment advisory agreement that was effective through December 31, 2020.
Subsequent to December 31, 2020, the advisory agreement was amended and was effective January 1, 2021.
Asset management or base management fee:
The asset management fees under the new advisory agreement for the three months ended March 31, 2021 were $0.68 million. The base management fee under the previous advisory agreement for the
three months ended March 31, 2020 was $0.65 million. The asset management fees are essentially on the same terms as the base management fees it was paying the Investment Adviser prior to 2021, namely based upon a percentage of Invested Capital.
2020. This increase of $0.03 million, or 4.07% was due to a slight increase in the Invested Capital by $7.05 million from $127.07 million as of March 31, 2020, to $134.12 million as of March 31, 2021.
Incentive management fee or subordinated incentive fee:
Under the new Advisory Management Agreement, the Company pays an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal
to 6% from the effective date of the Agreement. Under the previous advisory agreement that was effective through December 31, 2020, the subordinated incentive fee had two components; Capital Gains Fee and Income Fee. Capital Gains Fee was based on
realized gains (including the distributions received from sales/capital transactions) and the Income Fee was based on net investment income. The Company did not incur any incentive management fee for the three months ended March 31, 2021.
Similarly, the Company did not incur any subordinated incentive fee (Capital Gains Fee or Income Fee) during the three months ended March 31, 2020.This was because the cumulative net investment income and net realized gains were below the threshold
of 7% of Contributed Capital.
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Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended March 31, 2021, was $0.16 million as compared to $0.17 million for the three months ended March 31, 2020. The slight decrease was due to a
decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to March 31, 2020, as a result of the decrease in the Company’s capital raising activities.
Transfer agent cost reimbursement paid to MacKenzie for three months ended March 31, 2021 was $0.03 million as compared to $0.02 for the three months ended March 31, 2020. The slight increase was
due to additional software maintenance and implementation costs incurred by MacKenzie.
Property operating and maintenance expenses:
Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance and various other
administrative expenses incurred in the operation of the Company’s commercial and residential real estate assets. During the three months ended March 31, 2021, the Company incurred operating and maintenance expenses of $1.15 million, of which $1.09
million mainly incurred in the operation of Adison Corporate Center. Operating and maintenance expenses incurred in the operation of two residential apartments were $0.06 million since the properties was acquired and in operating for only one
month. The Company did not have such expenses during the three months ended March 31, 2020 as it did not own and operate any real estate assets as of March 31, 2020.
Depreciation and Amortization:
During the three months ended March 31, 2021, the Company recorded depreciation and amortization of $0.98 million, of which $0.80 million was the depreciation and amortization of real estate and
intangible assets it owned through the Operating Partnership. $0.18 million of the total related to the depreciation and amortization of real estate assets and intangibles owned through Madison and PVT. The Company did not have such expenses during
the three months ended March 31, 2020 as it did not own and operate any real estate assets as of March 31, 2020.
Interest Expense:
Interest expense for the three months ended March 31, 2021 was $0.27 million, of which $0.23 million the interest expense incurred on the notes payable associated with the Addison Corporate
Center and $0.04 million was the interest expense on the two mortgage notes payable associated with the two residential apartments. The Company did not incur any interest expense during the three months ended March 31, 2020 as it did not have any
notes payable outstanding as of March 31, 2020.
Other operating expenses:
Other operating expenses include amortization of deferred offering costs, professional fees, directors’ fees printing and mailing, and other general and administrative expenses. Other operating
expenses for the three months ended March 31, 2021 and 2020, were comparable at $0.16 million and $0.18 million, respectively.
Net realized gain/loss on investments:
During the three months ended March 31, 2021, the Company had a realized gain of $0.72 million as compared to $0.17 million during the three months ended March 31, 2020. Total realized gains for
the three months ended March 31, 2021, were realized from sales of seventeen publicly traded REIT securities with total realized gains of $0.90 million offset by a realized loss of $0.18 million from one limited partnership interest. Total realized
loss for the three months ended March 31, 2020, was realized from the final liquidation of two limited partnership interests.
Net unrealized gain/loss on investments:
During the three months ended March 31, 2021, we recorded net unrealized gains of $1.16 million and did not have any reclassification adjustments as the accumulated unrealized gains and losses as
of December 31, 2020 on all investments were recorded as carrying value adjustments due to the termination of the Company’s BDC status. 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 for the three months ended March 31, 2021, resulted from fair value appreciations of $0.84 million from limited partnership interests and $0.32 million from
non-traded REIT securities.
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During the three months ended March 31, 2020, we recorded net unrealized losses of $9.86 million, which were net of $1.08 million of unrealized gains reclassification adjustment. The
reclassification adjustment was the accumulated unrealized gains as of December 31, 2019, that were realized during the three months ended March 31, 2020. Accordingly, the net unrealized losses excluding the reclassification adjustment for the
three months ended March 31, 2020, were $8.78 million, which resulted from fair value depreciations of $4.51 million from non-traded REIT securities, $2.89 million from limited partnership interests and $1.38 million from publicly traded REIT
securities. The significant decline in the fair value during the current quarter was mainly due to the COVID-19 pandemic resulting in steep declines in domestic stock markets and in the traded prices for other financial assets as discussed above.
Income tax provision (benefit):
The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2019. Therefore, it did not incur any tax expense or excise tax on its
income from operations during the quarterly periods within the tax year 2019. Similarly, for the tax year 2020, 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 2020.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of March 31, 2021, they did not have any taxable income
for tax years 2020 or 2021. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during any fiscal period within the tax year 2020 and 2021.
The Operating Partnership is a limited partnership and its wholly owned subsidiary, the Property Owner, is a limited liability company. Accordingly, all income tax liabilities of these two entities flow through to
their partners, which is the Company. Therefore, no income tax provisions are recorded for these two entities.
Six Months Ended December 31, 2020, and 2019:
While we withdrew our BDC status effective December 31, 2020, for the entire six months ended December 31, 2020, we operated as a BDC. Therefore, the following operating activities of the Company
are reported as a BDC rather than an operating REIT.
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
six months ended December 31, 2020 and 2019, was $1.88 million and $4.33 million, respectively. The decrease of $2.45 million or 56.6%, was primarily due to suspensions of dividends and distributions from our investments as a result of the COVID-19
pandemic. During the six months ended December 31, 2020, the Company received $0.86 million of distributions from operations, sales and liquidations as compared to $2.82 million during the same period in 2019. Similarly, during the six months ended
December 31, 2020, we received dividend, interest and other investment income of $1.02 million as compared to $1.51 million during the same period in 2019.
Operating Expenses:
The Company’s following base management, portfolio structuring and subordinated incentive fees were based on the investment advisory agreement that was amended on October 2019 and was effective
through December 31, 2020. Subsequently, the advisory agreement was amended and was effective January 1, 2021.
Base management fee:
The base management fee for the six months ended December 31, 2020 was $1.34 million as compared to $1.24 million for the six months ended December 31, 2019. This increase of $0.10 million, or
8.1% was due to an increase in the Gross Invested Capital by $12.59 million from $121.41 million as of December 31, 2019, to $134.00 million as of December 31, 2020.
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Portfolio structuring fee :
The portfolio structuring fee for the six months ended December 31, 2020, was less than $0.01 million as compared to $0.36 million during the same period in 2019. This decrease was because the
Company raised lower amount of new capital during the six months ended December 31, 2020. During the six months ended December 31, 2020, the Company raised new capital of $0.22 million as compared to $11.97 million during the same period in 2019
through issuance of new shares excluding the DRIP.
Subordinated incentive fee:
Under the advisory agreement that was effective through December 31, 2020, the subordinated incentive fee had two components; Capital Gains Fee and Income Fee. Capital Gains Fee was based on
realized gains (including the distributions received from sales/capital transactions) and the Income Fee was based on net investment income.
There was neither Income Fee nor Capital Gains Fee for the six months ended December 31, 2020 and 2019. This was because the cumulative net investment income and net realized gains were below the
threshold of 7% of Contributed Capital.
Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the six months ended December 31, 2020, was $0.31 million as compared to $0.34 million for the six months ended December 31, 2019. The slight decrease was due to
a decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to December 31, 2019, as a result of the decrease in the Company’s capital raising activities.
Transfer agent cost reimbursement paid to MacKenzie for six months ended December 31, 2020 was $0.06 million as compared to $0.04 for the six months ended December 31, 2019. The slight increase
was due to additional software maintenance and implementation costs incurred by MacKenzie.
Other operating expenses:
Other operating expenses include amortization of deferred offering costs, professional fees, directors’ fees printing and mailing, and other general and administrative expenses. Other operating
expenses for the six months ended December 31, 2020 and 2019, were $0.72 million and $0.92 million. The decrease of $0.20 million or 21.7% was mainly due to a decrease of $0.30 million in amortization of deferred offering costs during the six
months ended December 31, 2020 partly offset by an increase of 0.09 million in professional fees during the six months ended December 31, 2020. The decrease in the amortization of deferred offering costs was due to only $0.20 million of deferred
offering cost expensed at the termination of our third public offering as compared to $0.45 million of deferred offering costs expensed in 2019 associated with our second public offering that terminated in October 2019. According to our accounting
policy, offering costs are capitalized as deferred offering costs as incurred by the Company and subsequently amortized to expense over a twelve-month period. Any deferred offering costs that have not been amortized upon the expiration or earlier
termination of an offering will be accelerated and expensed upon such expiration or termination. The increase in our professional fees was due to additional professional services obtained during the three months ended December 31, 2020 as a result
of the Company withdrawing its BDC status.
Net realized gain on investments:
During the six months ended December 31, 2020, the Company had a realized gain of $1.02 million as compared to $1.41 million during the six months ended December 31, 2019. Total realized gains
for the six months ended December 31, 2020, were primarily realized from sales of thirteen publicly traded REIT securities with a total gain of $0.99 million and three non-traded REIT securities with a total gain of $0.3 million. Total realized
gains for the six months ended December 31, 2019, were primarily realized from sales of three non-traded REIT securities with a total gain of $0.20 million, one limited partnership interests with a total gain of $0.58 million and one publicly
traded REIT security with a gain of 0.63 million.
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Net unrealized gain/loss on investments:
During the six months ended December 31, 2020, we recorded net unrealized losses of $10.14 million, which were net of $0.81 million of unrealized gains reclassification adjustments. The
reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized losses excluding the reclassification adjustment for the six
months ended December 31, 2020, were $9.33 million, which resulted from fair value depreciation of $7.32 million from limited partnership interests, $1.36 million from non-traded REIT securities, and $0.65 million from publicly traded REIT
securities. The large decrease in fair value of partnership interests was mainly due to the decline in the underlying property value of the Operating Partnership before consolidation resulting from unfavorable leasing activities as a result of the
COVID-19 pandemic.
During the six months ended December 31, 2019, we recorded net unrealized losses of $1.23 million, which were net of $0.33 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 losses excluding the reclassification adjustment for the six
months ended December 31, 2019, were $0.90 million, which resulted from fair value depreciation of $2.0 million from non-traded REIT securities and $0.78 million from publicly traded REIT securities offset by fair value appreciation of $1.88
million from limited partnership interests.
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 March 31, 2021, the Company has
raised total gross proceeds of $119.10 million from the issuance of shares under the three public offerings, $42.46 million from our first public offering, which concluded in October 2016, $67.99 million from the second public offering, which
concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $11.16 million from the issuance of shares under the DRIP. Of the total capital raised from the public
offerings as of March 31, 2021, we have used $9.46 million to repurchase shares under the Company’s share repurchase program. We filed a preliminary offering statement pursuant to Regulation A with the SEC to sell up to $50,000,000 of shares of the
Company’s Series A preferred stock at an initial offering price of $25.00 per share. The sale of shares pursuant to the offering will begin after the Offering Circular has been qualified by the SEC. We plan to fund future investments with the net
proceeds raised from our preferred equity offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt
investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities. While we were a BDC, we did not borrow money on a long-term basis or issue debt securities
at the Company level; however, now that our BDC status is withdrawn, we may borrow money within the underlying companies in which we have majority ownership. In addition, from time to time we may draw on the margin line of credit on a temporary
basis to bridge our investment purchases and sales or capital raising.
We intend to utilize leverage to enhance the total returns of our portfolio, and we expect to have greater flexibility in raising debt capital, following the withdrawal of our BDC election.
Historically, we have only been able to access leverage at attractive costs through a credit facility.
We also expect to have greater flexibility in issuing securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as
preferred) in order to facilitate capital formation now that we are no longer subject to the restrictions of the 1940 Act.
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The
maximum amount of such borrowing will no longer be limited by the 1940 Act.
We used the funds raised from our public offerings to invest in portfolio companies, paying cash dividends to holders of our common stock (from investment income and realized capital gains), and
paying operating expenses.
The Company finished the quarter ended March 31, 2021 with cash and cash equivalents, restricted cash, and receivables of $5.28 million, and approximately $1.62 million of liabilities.
Additionally, it anticipates receiving approximately $3.50 million from its short-term investments during the quarter ended June 30, 2021. Because of its strong liquidity and the liquidity preservation measures taken by the board, the Company is
currently capable of meeting all of its obligations and continue its operations for the foreseeable future. The Company intends to continue to qualify as a REIT and to meet the associated testing requirements, including paying out at least 90% of
its taxable income.
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Cash Flows:
Due to the termination of the Company’s BDC status effective December 31, 2020, during the current fiscal year, the Company operated as a BDC for the period of July 1 through December 31, 2020 and as an operating
REIT for the period of January 1, 2021 through March 31, 2021. Therefore, the current fiscal year-to-date cash flow activities have been discussed in two different periods; three months ended March 31, 2021 and six months ended December 31, 2020.
Three months ended March 31, 2021(As an Operating REIT):
For the three months ended March 31, 2021, we experienced a net decrease in cash of $10.15 million. During this period, we generated cash of $0.54 million from our operating activities and $15.10
million from our financing activities and used $25.80 million in our investing activities.
The net cash inflow of $0.54 million from operating activities resulted from $2.18 million of rental revenues and $1.48 million of investment income offset by $3.12 million of cash used in
operating expenses.
The net cash outflow of $25.80 million from investing activities resulted from real estate acquisitions through our subsidiaries of $28.62 million and purchases of equity investments of $7.38
million offset by cash inflows of $8.58 million from sale of investments and $1.62 million from distributions received from our investments that are considered return of capital.
The net cash inflow of $15.11 million from financing activities resulted from note payable proceeds of $15.13 million received for financing the real estate acquisitions and $0.20 million of
capital contributions received from the non-controlling interest holders offset by payments on existing note payable of $0.22.
Six months ended December 31, 2020 (As a BDC):
For the six months ended December 31, 2020, we experienced a net increase in cash of $5.20 million. During this period, we generated cash of $3.14 million from our operating activities, $1.93
from investing activities and $0.13 million from our financing activities.
The net cash inflow of $5.07 million from operating activities resulted from $10.94 million from distributions received from our investments that are considered return of capital and $5.26
million from sales and liquidations of investments offset by $12.69 million of cash used in purchasing investments and $0.37 million used in operating expenses, net of investment income.
The net cash inflow of $1.93 million from investing activities resulted from the consolidation of the Operating Partnership as of December 31, 2020.
The net cash inflow of $0.13 million from financing activities resulted from the sale of shares under our third public offering with gross proceeds of $0.14 million (net of $0.09 million of
decrease in capital pending acceptance) offset by cash outflows of $0.01 million from payments of selling commissions and fees.
Nine months ended March 31, 2020:
For the nine months ended March 31, 2020, we experienced a net increase in cash of $11.79 million. During this period, we generated cash of $1.71 million from our operating activities and $10.08
million from our financing activities.
The net cash inflow of $1.71 million from operating activities resulted from $31.37 million from distributions received from our investments that are considered return of capital, $6.45 million
from sales and liquidations of investments and $2.67 million from investment income, net of operating expenses offset by $38.78 million of cash used in purchasing investments.
The net cash inflow of $10.08 million from financing activities resulted from the sale of shares under our second and third public offering with gross proceeds of $18.54 million (adjusted for
$0.01 million of increase in capital pending acceptance) offset by cash outflows of $3.56 million from payments of cash dividends, $3.19 million from share redemptions, and $1.71 million from payments of selling commissions and fees.
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Contractual Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Agreement, under which the Real Estate Adviser serves as our adviser, and (ii) the
Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon
proper notice. Payments under the Advisory Agreement in future periods will be (i) a percentage of the value of our Invested Capital; (ii) Acquisition Fees, and (iii) incentive fees based on our performance above specified hurdles. Payments under
the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources.
Borrowings
We do not have any current plans to borrow money at the Company level. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our
operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional
debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates.
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. Due to the termination
of the Company’s status as a BDC, the Company adopted various new accounting policies as of March 31, 2021. Those new accounting policies are disclosed in Note 2 of the financial statements included in this Form 10-Q. Other than those new policies,
there have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2020, included in the Company’s annual report on Form 10-K for the fiscal year ended June 30,
2020.
Dividends to Stockholders
We pay quarterly dividends to stockholders to the extent that we have income from operations available. Our quarterly dividends, if any, will be determined by our Board of Directors after a
review and distributed pro-rata to holders of our shares; we declare dividends on a monthly basis, but pay each quarter. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we
permitted to borrow money to make dividends if the amount of such dividend would exceed our annual accrued and received revenues, less operating costs. Dividends in kind are not permitted, except as provided in our Charter.
We have elected to be treated as a REIT under the Code. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. Our
current intention is to make any dividends in additional shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state
securities regulator. If one holds shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will
achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if
dividends are limited by the terms of any of our borrowings.
On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, the Company’s board of directors unanimously approved the suspension of
regular quarterly dividends to the Company’s stockholders. As a result, the Company did not pay or accrue any dividend for the quarter ended March 31, 2021. However, on May 10, 2021, the Board of Directors reinstated the quarterly dividend at
the rate of $0.05 per common share, payable to holders of record as of May 15, 2021. The Board intends to continue such dividend so long as it is supported by the previous quarter’s income, but may increase or decrease the dividend
accordingly.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.