MacKenzie Realty Capital, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements by MacKenzie Realty Capital, Inc., its wholly owned subsidiaries MRC TRS, Inc. and MacKenzie Satellite Place Corp., and, our majority owned subsidiaries MacKenzie Realty Operating Partnership, LP, Madison-PVT Partners LLC and PVT-Madison Partners LLC (the “Company,” “we,” or “us”) contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, stockholders can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. An economic downturn could impair our ability to continue to operate, which could lead to the loss of some or all of our investments, a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities, and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in our Annual Report on Form 10-K. We may experience fluctuations in our operating results due to a number of factors, including the effect of the withdrawal of our BDC election, the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. Overview Historically, we were an externally managed non-diversified closed-end management investment company that elected to be treated as a BDC under the 1940 Act, but we withdrew our election to be treated as a BDC on December 31, 2020. Our objective remains to generate both current income and capital appreciation through real estate-related investments. We have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our taxable income, we will be subject to an excise tax on our undistributed taxable income. Our wholly owned subsidiary, MRC TRS, Inc., is subject to corporate federal and state income tax on its taxable income at regular statutory rates. We are managed by the Advisers, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate. Investment Plan Now that we are no longer a BDC, we generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up to 20% of our total assets in investment securities of real estate companies. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate. We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. When purchasing securities, we generally favor purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate related investments. Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our independent directors review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings. 31 Table of Contents We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities at significant discounts to their net asset value. We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as necessary to extract unrealized value. We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of the Adviser’s investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from what the Adviser estimates to be the actual or potential value of the real estate. Our investment strategies include making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing, tenant improvements or encounter other cash needs. Since entering the recent recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in some cases, we have provided additional capital to the extent that we now own the majority of the project. In such cases, we intend to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status. We intend to continue our historical activities related to tender offers for shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions, subject to the constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us to pay distributions that are supported by cash flow rather than paying back investors’ capital, although there can be no assurance that some portion of any distribution is not a return of capital. Rental and Reimbursement We generate rental revenue by leasing office space and apartment units to the building’s tenants. These tenant leases fall under the scope of ASC 842 and are classified as operating leases. Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements. Investment income We generate revenues in the form operating income, capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection with our investments and recognized as earned. Expenses Our primary operating expenses include the payment of: (i) advisory fees to our Advisers; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment and Real Estate Adviser for their work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including: • the cost of operating and maintaining real estate properties; • the cost of calculating our net asset value, including the cost of any third-party valuation services; • the cost of effecting sales and repurchases of our shares and other securities; • interest payable on debt, if any, to finance our investments; • fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees; • transfer agent and safekeeping fees; • fees and expenses associated with marketing efforts; • federal and state registration fees, any stock exchange listing fees in the future; • federal, state and local taxes; • independent directors’ fees and expenses; 32 Table of Contents • brokerage commissions; • fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums; • direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff; • fees and expenses associated with independent audits and outside legal costs; • costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and • all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff. Portfolio Investment Composition Beginning with the withdrawal of our election to be treated as a BDC on December 31, 2020, we began transforming our portfolio of investments in an orderly fashion into one comprised of controlled real estate investments (either wholly owned or controlled through voting securities). As of December 31, 2022, we still owned various real estate limited partnerships and REITs that are listed in the “Investments, at fair value” in the table below. We also owned various investments in entities that own real estate which gave us enough control such that the investments are not securities for 1940 Act purposes, but not enough to consolidate the financials of such entities with our own; these are listed below as “Unconsolidated investments (non-securities), at fair value.” As a result of the change in our status and applying the new basis of accounting, on the effective date of the termination of our status as a BDC, we recorded the fair value of the investments as the new carrying value of the investments. The following table summarizes the composition of our investments at fair value as of December 31, and June 30, 2022: Fair Value Investments, at fair value December 31, 2022 June 30, 2022 3100 Airport Way South LP $ 418,742 $ 330,000 5210 Fountaingate 6,820 6,820 American Healthcare REIT, Inc. – Class I - 416,115 Capitol Hill Partners, LLC 1,563,700 1,518,100 Citrus Park Hotel Holdings, LLC 4,100,000 5,000,000 Coastal Realty Business Trust, REEP, Inc. - A - 49,178 Corporate Property Associates 18 Global A Inc. - 42,256 Healthcare Trust, Inc. 2,426,500 3,866,394 HGR Liquidating Trust - 732 Highlands REIT Inc. 3,750,385 3,750,385 KBS Real Estate Investment Trust II, Inc. 778,243 1,010,350 Lakemont Partners, LLC 866,700 806,290 Moody National REIT II, Inc. 14,911 15,969 Secured Income, LP - 520,594 SmartStop Self Storage REIT, Inc Class A 103,176 120,922 SmartStop Self Storage REIT, Inc Class T - 9,885 Strategic Realty Trust, Inc. 248,806 311,007 Summit Healthcare REIT, Inc. 1,149,399 1,973,211 Total $ 15,427,382 $ 19,748,208 33 Table of Contents Fair Value Unconsolidated investments (non-security), at fair value December 31, 2022 June 30, 2022 1300 Main, LP $ - $ 1,688,000 Dimensions28 LLP 22,132,872 19,512,036 First & Main, LP - 2,237,000 Green Valley Medical Center, LP 2,773,500 3,010,000 Main Street West, LP 5,210,000 4,708,000 Martin Plaza Associates, LP 675,000 725,000 One Harbor Center, LP 4,289,500 4,162,000 Westside Professional Center I, LP 1,845,000 1,803,000 Woodland Corporate Center Two, LP - - Total $ 36,925,872 $ 37,845,036 Properties In addition to our investment securities, we currently own and manage four commercial real estate properties: Addison Corporate Center located in Windsor, CT, Satellite Place in Duluth, GA, 1300 Main Office Building in Napa, CA and First & Main Office Building in Napa, CA. We also own four residential apartments: Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA, the Hollywood Apartments located in Los Angeles, CA, and the Shoreline Apartments in Concord, CA. These eight properties are owned through our eight subsidiaries as noted in below table. First & Main, LP and 1300 Main, LP became wholly owned subsidiaries of the Operating Partnership in July 2022 and October 2022, respectively. Property: Property Owners Addison Corporate Center Addison Property Owner, LLC Commodore Apartments Madison-PVT Partners LLC Pon De Leo Apartments PVT-Madison Partners LLC Hollywood Apartments PT Hillview GP, LLC Shoreline Apartments MacKenzie BAA IG Shoreline LLC Satellite Place Office Building MacKenzie Satellite Place Corp. First & Main Office Building First & Main, LP 1300 Main Office Building 1300 Main, LP Addison Corporate Center contains 605,502 square feet, of which approximately 185,000 square feet is office space and the remainder is designated as flex office/warehouse space. Addison Corporate Center serves as a collateral to a loan which matured on April 30, 2022. After the maturity, Addison Property Owner was unable to extend the loan and entered into a forbearance agreement with the lender on June 28, 2022. Pursuant to the forbearance agreement, the property is currently being marketed for sale. Accordingly, Addison Corporate Center is classified as an asset held for sale as of December 31, 2022. As of December 31, 2022, the property is approximately 40% occupied by 6 tenants. The following table shows the largest tenants and square footage occupied: Largest Tenants Business Business Square Ft. Occupied Rent per annum Lease Expiration Renewal options Triumph Aircraft design, manufacturing, and engineering 88,255 $ 359,049 5/31/27 No Belcan Global Engineering and Consulting 66,072 $ 1,202,450 9/30/29 No Quest Diagnostics Laboratory Services 65,459 $ 1,281,905 10/31/25 1, 3 years 34 Table of Contents The following information pertains to lease expirations at the Addison Corporate Center: Year Number of Leases Expiring Total Area Annual Rent Percentage of Gross Rent 2025 2 70,164 $ 1,372,427 43 % 2027 3 104,032 $ 634,839 20 % 2029 1 66,072 $ 1,202,450 37 % First & Main Office Building contains 27,396 square feet, of which approximately 19,000 square feet is office space and the remainder is designated as retail space. As of December 31, 2022, the property is 100% occupied by 8 tenants. The following table shows the largest tenants and square footage occupied: Largest Tenants Business Business Square Ft. Occupied Rent per annum Lease Expiration Renewal options GVM Law Legal Services 9,470 $ 482,439 9/20/2026 2, 5 years Brotlemarkle Accounting Services 4,366 $ 232,735 7/31/2030 2, 5 years Napa Palisades Restaurant 3,462 $ 184,103 8/31/2040 3, 5 years Moss Adams Accounting Services 3,428 $ 173,616 6/30/2023 2, 5 years The following information pertains to lease expirations at First & Main Office Building: Year Number of Leases Expiring Total Area Annual Rent Percentage of Gross Rent 2023 2 4,000 $ 199,896 14 % 2024 1 1,135 $ 69,435 5 % 2025 1 2,220 $ 138,053 10 % 2026 1 9,470 $ 482,439 35 % Thereafter 3 9,243 $ 493,636 36 % 1300 Main Office Building contains 20,145 square feet, of which approximately 13,900 square feet is office space and the remainder is designated as retail space. As of December 31, 2022, the property is 100% occupied by 8 tenants. The following table shows the largest tenants and square footage occupied: Largest Tenants Business Business Square Ft. Occupied Rent per annum Lease Expiration Renewal options Wilson Daniels Wine Wholesaler 6,712 $ 404,868 3/15/2025 2, 6 years Hal Yamashita Restaurant 3,212 $ 186,852 7/31/2026 3, 5 years Norcal Gold Real Estate 2,896 $ 169,912 3/31/2026 3, 6 years Shackford’s Kitchen Retail 2,409 $ 134,028 9/29/2032 9, 10 years The following information pertains to lease expirations at 1300 Main Office Building: Year Number of Leases Expiring Total Area Annual Rent Percentage of Gross Rent 2024 1 1,088 $ 70,692 6 % 2025 2 8,898 $ 535,464 45 % 2026 2 6,108 $ 352,764 30 % Thereafter 3 4,051 $ 227,544 19 % 35 Table of Contents Satellite Place is a six-story office building contains 143,785 square feet of rentable office area located in Duluth, Georgia. As of December 31, 2022, the property is approximately 53% occupied by 1 tenant as listed in below table. Largest Tenants Business Business Square Ft. Occupied Rent per annum Lease Expiration Renewal options OS National, LLC Title Services 71,085 $ 1,339,952 12/31/2029 2, 5 years The following information pertains to lease expirations at Satellite Place Office Building: Year Number of Leases Expiring Total Area Annual Rent Percentage of Gross Rent 2029 1 71,085 $ 1,339,952 100 % Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of December 31, 2022, Commodore Apartment building is approximately 93.8% occupied. Pon De Leo Apartments is also a mid-rise apartment building built in 1929 and has 39 units. As of December 31, 2022, Pon Do Leo Apartment building is approximately 97.4% occupied. Hollywood Apartments, located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has 53 units. The property contains approximately 37,000 square feet of net rentable apartment area and 8,560 square feet of retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 96.2% occupied as of December 31, 2022 as the property recently began to add tenants after renovations. The property underwent extensive renovations in order to reposition the complex as a premier rental with significant rate increases over previous years. Virtually all of the renovations have been completed, with the final apartments scheduled to be finished as remaining tenants vacate. A grand opening for the public was held in early April and marketing of the newly renovated units began in late April. Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015 which has 84 units. As of December 31, 2022, Shoreline Apartments building is approximately 91.7% occupied. The following table provides information regarding each of the residential properties: Property Name Sector Location Square Feet Units Percentage Leased Annual Base Rent Monthly Base Rent/Occupied Unit Pon De Leo Multi-Family Residential Oakland, CA 36,654 39 97.4 % $ 1,072,683 $ 2,352 Commodore Multi-Family Residential Oakland, CA 31,156 48 93.8 % $ 894,222 $ 1,573 Hollywood Apartments Multi-Family Residential Los Angeles, CA 36,991 53 96.2 % $ 1,491,287 $ 2,436 Shoreline Apartments Multi-Family Residential Concord, CA 67,925 84 91.7 % $ 1,932,780 $ 2,092 Property Name Sector Location Square Feet Units Percentage Leased Annual Base Rent Monthly Base Rent/Occupied Unit Hollywood Apartments Retail Los Angeles, CA 8,560 1 100.0 % $ 314,220 $ 26,185 Aurora Land Development We also own a parcel of entitled land of approximately 3 acres located at the corner of Business Center Drive and Healthcare Drive in Fairfield, California. We plan to build a multi-family residential building on this land and are currently working on the design of the building. The development application will be submitted to the City of Fairfield in February 2023. There are no present plans for the improvement or development of any property except for the Hollywood Apartments and Aurora land development. Each property is being held for income production and increased occupancy and/or rental rates. We have property and liability insurance policies on all properties which we believe are adequate. 36 Table of Contents The markets in which our properties (those consolidated and those that are not yet consolidated) operate are highly competitive, and each property faces unique competitive challenges based upon local economic, political, and legal factors. Our West coast multi-family properties, Commodore Apartments, and Pon De Leo Apartments, are generally restricted from raising rents by local rent control laws. Two of our unconsolidated investments in apartment properties, Lakemont Partners and Capitol Hill, are also subject to rent control. Rent control can result in average rents that are significantly below market, and this provides some buffer against declining rents in a recession. However, in order to encourage development, rent control usually does not apply to newer properties. Since older properties may be unable to raise rents as needed, they may be unable to make improvements that could allow them to compete with newer properties. Our consolidated office properties, Addison Corporate Center, 1300 Main, First and Main, and Satellite Place, are Class B, Class A, Class A, Class A, and Class A suburban office properties located in Windsor, Connecticut, Napa, California, Napa, California, and Duluth, Georgia, respectively. These properties must compete with every other office property in the market, as well as facing the uncertainty of workers returning to the office after COVID-19. Our unconsolidated investment in a hotel property, Citrus Park Hotel, is a Courtyard by Marriott located in the Tampa/St. Petersburg market that competes for business and leisure travel. Citrus Park suffered a significant decline during 2020 as a result of a drastic reduction in business and leisure travel but is now near pre COVID-19 levels in revenue. Results of Operations COVID-19 pandemic Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of the COVID-19 pandemic, including social distancing and other restrictions on travel, congregation, and business operations have already resulted in significant negative economic impacts. In addition, some of the companies in which we have invested have cancelled their quarterly dividends and distributions for the current and future quarters. The long-term impact of the COVID-19 pandemic and any future outbreaks or variants on the United States and world economies remains uncertain, but may result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted . MacKenzie and our Advisers have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. They implemented business continuity plans and the management team is in place to respond to changes in the global environment quickly and effectively. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response and assessing potential impacts to our financial position and operating results. This includes the evaluation and implementation of certain efforts to help us mitigate the impact that reduced revenues from distributions and capital events may have on our fiscal year 2022 financial results. We are focusing on maintaining a strong balance sheet and liquidity position and searching for opportunistic investments. In anticipation of reduced revenues and uncertain future economic conditions, the Board of Directors had discontinued distributions starting March 2020 and share redemptions starting May 2020. However, after reassessing our cash flow, the Board of Directors resumed the share redemptions in March of 2021 and reinstated the quarterly distributions in May 2021. The Board intends to continue quarterly distributions so long as it is supported by the previous quarter’s income, but retains discretion to increase or decrease the distributions. Three Months Ended December 31, 2022 and 2021 Rental and reimbursements revenues: Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the three months ended December 31, 2022, we generated $3.67 million in rental and reimbursements revenues, of which $2.20 million was generated from our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building), $1.47 million from our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). During the three months ended December 31, 2021, we generated $2.57 million in rental and reimbursements revenues, of which $1.88 million was generated from the Addison Corporate Center tenants and $0.69 million from our three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments). 37 Table of Contents 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 December 31, 2022 and 2021 was $0.31 million and $1.21 million, respectively. During the three months ended December 31, 2022, we received $0.24 million of distributions from operations, sales, and liquidations as compared to $0.91 million during the three months ended December 31, 2021. During the three months ended December 31, 2022, we received dividends, interest, and other investment income of $0.07 million as compared to $0.30 million received during the three months ended December 31, 2021. Expenses: The Company’s asset management and incentive management fees are based on the advisory agreement that was effective January 1, 2021. Asset management fee: The asset management fees for the three months ended December 31, 2022 and 2021 were $0.74 million and $0.67 million, respectively. The slight increase was due to an increase in the Invested Capital since December 31, 2021. Incentive management fee: Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. We did not incur any incentive management fee for the three months ended December 31, 2022 and 2021. Administrative cost reimbursements and Transfer agent reimbursements: Costs reimbursed to MacKenzie for the three months ended December 31, 2022, were $0.18 million as compared to $0.15 million for the three months ended December 31, 2021. The slight increase was due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to December 31, 2021, as a result of the increase in the number of real estate assets owned by us since December 2021. Transfer agent cost reimbursement paid to MacKenzie for three months ended December 31, 2022 and 2021 were $0.02 million and $0.03 million, respectively. Property operating and maintenance expenses: Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other administrative expenses incurred in the operation of our commercial and residential real estate assets. During the three months ended December 31, 2022, we incurred operating and maintenance expenses of $2.29 million, of which $1.67 million were incurred in the operation of our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $0.62 million from our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). During the three months ended December 31, 2021, we incurred operating and maintenance expenses of $1.84 million, of which $1.27 million was incurred in the operation of Addison Corporate Center. Operating and maintenance expenses incurred in the operation of three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments) were $0.57 million. Depreciation and amortization: During the three months ended December 31, 2022, we recorded depreciation and amortization of $1.16 million, of which $0.57 million was the depreciation and amortization of real estate and intangible assets of our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $0.59 million of our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). During the three months ended December 31, 2021, we recorded depreciation and amortization of $1.11 million, of which $0.84 million was the depreciation and amortization of real estate and intangible assets of Addison Corporate Center and $0.27 million of the three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments). 38 Table of Contents Interest expense: Interest expense for the three months ended December 31, 2022 was $1.68 million, of which $1.01 million was incurred on the notes payable associated with our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $0.67 million was incurred on the mortgage notes payable associated with our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). Interest expense for the three months ended December 31, 2021 was $0.50 million, of which $0.38 million was incurred on the notes payable associated with the Addison Corporate Center and $0.12 million was incurred on the two mortgage notes payable associated with the three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments). Other operating expenses: Other operating expenses include professional fees, directors’ fees, printing and mailing expenses, and other general and administrative expenses. Other operating expenses for the three months ended December 31, 2022 and 2021, were $0.38 million and $0.30 million, respectively. The increase in other operating expenses is due to the acquisition of new properties: Shoreline Apartments in May 2022, Satellite Place Office Building in June 2022, First & Main Office Building in July 2022, 1300 Main Office Building in October 2022, resulting in higher amounts of general and administrative operating expenses during the three months ended December 31, 2022. Net realized gain/loss on investments: During the three months ended December 31, 2022, we had a realized gain of $0.31 million as compared to $3.75 million during the three months ended December 31, 2021. Total realized gains for the three months ended December 31, 2022, were realized from sale of four non-traded REIT securities with total realized gain of $0.26 million, and an investment trust with realized gains of $0.05 million. Total realized gains for the three months ended December 31, 2021, were realized from sales of six non-traded REIT securities with net realized gain of $3.75 million. Net unrealized gain/loss on investments: During the three months ended December 31, 2022, we recorded net unrealized loss of $0.83 million, which were net of $ 0.19 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 loss excluding the reclassification adjustment for the three months ended December 31, 2022 were $0.64 million, which resulted from fair value depreciations $0.18 million from limited partnership interests, $0.03 million from general partnership interests, $0.40 million from non-traded REIT securities and $0.03 million from investment trust. During the three months ended December 31, 2021, we recorded net unrealized gains of $1.63 million, which were net of $0.10 million of unrealized gains reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains excluding the reclassification adjustment for the three months ended December 31, 2021, were $1.73 million, which resulted from fair value appreciation of $1.60 million from limited partnership interests, $0.25 million from non-traded REIT securities, $0.01 million from investment trust, and offset by fair value depreciation of $0.13 million from publicly traded REIT securities. Income tax provision (benefit): The Parent Company has elected to be treated as a REIT for tax purposes under the Code and, as a REIT, is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions. To the extent that it satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2021. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2021. Similarly, for the tax year 2022, we believe the Parent Company paid the requisite amounts of dividends during the year and met other REIT requirements such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal periods within the tax year 2022. 39 Table of Contents TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on their taxable income at regular statutory rates. However, as of December 31, 2022, they did not have any taxable income for tax years 2021 or 2022. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during any fiscal period within the tax year 2021 and 2022. MacKenzie Satellite is a qualified REIT subsidiary of the Parent Company. Therefore, it does not file a separate tax return. The Operating Partnership is a limited partnership and its subsidiaries; Addison Property Owner, LLC (the “Addison Property Owner”), Hollywood Hillview Owner, LLC (“Hollywood Hillview”) and MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”) are limited liability companies. Madison and PVT are also limited liability companies. First & Main, LP and 1300 Main, LP are limited partnerships. Accordingly, all income tax liabilities of these entities flow through to their partners, which ultimately is the Company. Therefore, no income tax provisions are recorded for these entities. Six Months Ended December 31, 2022 and 2021 Rental and reimbursements revenues: Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the six months ended December 31, 2022, we generated $6.74 million in rental and reimbursements revenues, of which $3.90 million was generated from our commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building), and $2.84 million from our four residential apartments (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). During the six months ended December 31, 2021, we generated $5.29 million in rental and reimbursements revenues, of which $4.06 million was generated from the Addison Corporate Center tenants and $1.23 million from the three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments). Investment income: Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the six months ended December 31, 2022 and 2021 was $0.76 million and $3.35 million, respectively. During the six months ended December 31, 2022, we received $0.56 million of distributions from operations, sales, and liquidations as compared to $2.68 million during the six months ended December 31, 2021. During the six months ended December 31, 2022, we received dividends, interest, and other investment income of $0.20 million as compared to $0.67 million received during the six months ended December 31, 2021. Expenses: The Company’s asset management and incentive management fees are based on the advisory agreement that was effective January 1, 2021. Asset management fee: The asset management fees for the six months ended December 31, 2022 and 2021 were $1.46 million and $1.35 million, respectively. The slight increase was due to an increase in the Invested Capital since December 31, 2021. Incentive management fee: Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. We did not incur any incentive management fee for the six months ended December 31, 2022 and 2021. Administrative cost reimbursements and Transfer agent reimbursements: Costs reimbursed to MacKenzie for the six months ended December 31, 2022, were $0.36 million as compared to $0.30 million for the six months ended December 31, 2021. The slight increase was due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to December 31, 2021, as a result of the increase in the number of real estate assets owned by us since December 2021. 40 Table of Contents Transfer agent cost reimbursement paid to MacKenzie for six months ended December 31, 2022 and 2021 were both $0.05 million. Property operating and maintenance expenses: Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other administrative expenses incurred in the operation of our commercial and residential real estate assets. During the six months ended December 31, 2022, we incurred operating and maintenance expenses of $4.12 million, of which $2.88 million mainly were incurred in the operation of our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $1.24 million from our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments) During the six months ended December 31, 2021, we incurred operating and maintenance expenses of $3.24 million, of which $2.44 million mainly incurred in the operation of Addison Corporate Center. Operating and maintenance expenses incurred in the operation of three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments) were $0.80 million. Depreciation and amortization: During the six months ended December 31, 2022, we recorded depreciation and amortization of $2.08 million, of which $0.93 million was the depreciation and amortization of real estate and intangible assets of our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $1.15 million of our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). During the six months ended December 31, 2021, we recorded depreciation and amortization of $2.08 million, of which $1.66 million was the depreciation and amortization of real estate and intangible assets of Addison Corporate Center and $0.42 million of the three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments). Interest expense: Interest expense for the six months ended December 31, 2022 was $3.26 million, of which $1.67 million was incurred on the notes payable associated with our four commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building and 1300 Main Office Building) and $1.59 million was incurred on the mortgage notes payable associated our four residential properties (Commodore Apartments, Pon De Leo Apartments, Hollywood Apartments, and Shoreline Apartments). Interest expense for the six months ended December 31, 2021 was $0.85 million, of which $0.61 million was incurred on the notes payable associated with the Addison Corporate Center and $0.24 million was incurred on the mortgage notes payable associated with the three residential properties (Commodore Apartments, Pon De Leo Apartments and Hollywood Apartments. Other operating expenses: Other operating expenses include professional fees, directors’ fees, printing and mailing expenses, and other general and administrative expenses. Other operating expenses for the six months ended December 31, 2022 and 2021, were $0.71 million and $0.57 million, respectively. The increase in other operating expenses is due to the acquisition of new properties: Shoreline Apartments in May 2022, Satellite Place Office Building in June 2022, First & Main Office Building in July 2022 and 1300 Main Office Building in October 2022, resulting in higher amounts of general and administrative operating expenses during the six months ended December 31, 2022. Net realized gain/loss on investments: During the six months ended December 31, 2022, we had a realized gain of $0.83 million as compared to $4.35 million during the six months ended December 31, 2021. Total realized gains for the six months ended December 31, 2022, were realized from sale of a publicly traded REIT securities with realized gain of $0.01 million, six non-traded REIT securities with total realized gain of $0.44 million, and a limited partnership interest with realized gains of $0.33 million and investment trust of $0.05. Total realized gains for the six months ended December 31, 2021, were realized from sales of a publicly traded REIT security with total realized gains of $0.07 million and twelve non-traded REIT securities with net realized gain of $4.28 million. 41 Table of Contents Net unrealized gain/loss on investments: During the six months ended December 31, 2022, we recorded net unrealized gains of $2.01 million, which were net of $ 0.68 million of unrealized gains reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly , the net unrealized gains excluding the reclassification adjustment for the six months ended December 31, 2022 were $2.69 million, which resulted from fair value appreciations of $2.81 million from limited partnership interests, and $0.62 million from general partnership interests and fair value depreciations of $0.74 million from non-traded REIT securities. During the six months ended December 31, 2021, we recorded net unrealized gains of $4.92 million, which were net of $1.72 million of unrealized gains reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains excluding the reclassification adjustment for the six months ended December 31, 2021, were $6.64 million, which resulted from fair value appreciation of $3.08 million from limited partnership interests, $3.54 million from non-traded REIT securities, $0.01 from investment trust and $0.01 million from publicly traded REIT securities. Income tax provision (benefit): Income tax provision for six months ended December 31, 2022, and 2021 are discussed above under the three months ended section. Liquidity and Capital Resources Capital Resources: We offered to sell up to 5 million shares under our first public offering and up to 15 million shares each under our second and third public offerings. We have raised total gross proceeds of $119.10 million from the issuance of shares under the three public offerings, $42.46 million from our first public offering, which concluded in October 2016, $67.99 million from the second public offering, which concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $13.36 million from the issuance of shares under the DRIP. Of the total capital raised from the public offerings as of December 31, 2022, we have used $12.45 million to repurchase shares under our share repurchase program. In November 2021, the SEC qualified our offering statement pursuant to Regulation A to sell up to $50,000,000 of shares of our Series A preferred stock at an initial offering price of $25.00 per share. On October 14, 2022, we increased the offering to sell up to $75 million of shares of our Series A preferred stock. We raised $12.36 million pursuant to the Offering Circular as of December 31, 2022. We plan to fund future investments with the net proceeds raised from our preferred equity offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities. While we were a BDC, we did not borrow money on a long-term basis or issue debt securities at the Company level; however, now that our BDC status is withdrawn, we may borrow money within the underlying companies in which we have majority ownership. In addition, from time to time we may draw on the margin line of credit on a temporary basis to bridge our investment purchases and sales or capital raising. We intend to utilize leverage to enhance the total returns of our portfolio, and we expect to have greater flexibility in raising debt capital, following the withdrawal of our BDC election. Historically, we have only been able to access leverage at attractive costs through a credit facility. We also expect to have greater flexibility in issuing securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as preferred) in order to facilitate capital formation now that we are no longer subject to the restrictions of the 1940 Act. Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The maximum amount of such borrowing will no longer be limited by the 1940 Act. We used the funds raised from our public offerings to invest in portfolio companies, paying cash distributions to holders of our common stock (from investment income and realized capital gains), and paying operating expenses. 42 Table of Contents We finished the three months ended December 31, 2022 with cash and cash equivalents, restricted cash, and receivables of $8.51 million, and approximately $3.91 million of current liabilities. Because of our strong liquidity and the liquidity preservation measures taken by the board, we are currently capable of meeting all of our obligations and continue our operations for the foreseeable future. We intend to continue to qualify as a REIT and to meet the associated testing requirements, including paying out at least 90% of our taxable income. Cash Flows: Six months ended December 31, 2022: For the six months ended December 31, 2022, we experienced a net decrease in cash of $0.82 million. During this period , we generated cash of $7.90 million from our financing activities and used $3.48 million in our operating activities and $5.24 million from our investing activities. The net cash outflow of $3.48 million from operating activities resulted from $8.13 million of rental revenues and $0.76 million of investment income offset by $12.37 million of cash used in operating expenses. The net cash outflow of $5.24 million from investing activities resulted from real estate acquisitions through our subsidiaries of $8.23 million, investment acquisition deposit of $0.19 million, payment of contingent liability of $0.86 million and purchases of equity investments of $0.18 million offset by cash inflows of $3.20 million from sale of investments, and $1.02 million from distributions received from our investments that are considered return of capital. The net cash inflow of $7.90 million from financing activities resulted from payment of dividends of $2.03 million, $0.73 million redemption of common stocks, payments of syndication cost amounting to $0.81 million, capital distributions to non-controlling interests holders amounting to $ 0.17 million, $0.01 million payment of notes payables, and $0.20 million payment of mortgage payables offset by $9.40 million proceeds from the issuance of preferred stock, $0.01 million proceeds from notes payables, $2.10 million proceeds from mortgage payables and $0.34 million from capital pending acceptance. Six months ended December 31, 2021: For the six months ended December 31, 2021, we experienced a net increase in cash of $17.57 million. During this period, we generated cash of $2.25 million from our operating activities, $2.49 million from our investing activities and $12.83 million in our financing activities. The net cash inflow of $2.25 million from operating activities resulted from $5.44 million of rental revenues and $3.35 million of investment income offset by $6.54 million of cash used in operating expenses. The net cash inflow of $2.49 million from investing activities resulted from real estate acquisitions through our subsidiaries of $21.78 million and purchases of equity investments of $3.23 million offset by cash inflows of $23.30 million from sale of investments and $4.20 million from distributions received from our investments that are considered return of capital. The net cash inflow of $12.83 million from financing activities resulted from payment of dividends of $1.21 million, $0.06 million redemption of common stocks, payment of deferred finance cost amounting to $0.78 million, payment of syndication cost amounting $0.43 million and payment on existing note payables of $0.71 million offset by cash inflows of contributions by non-controlling interests holders amounting to $0.86 million, $0.09 million proceeds from issuance of preferred stock, $0.07 million change in capital acceptance, and $15.00 million proceeds from note payables. 43 Table of Contents Material Cash Obligations We have entered into two contracts under which we have material future commitments: (i) the Advisory Management Agreement, under which the Real Estate Adviser serves as our adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Advisory Management Agreement in future periods will be (i) a percentage of the value of our Invested Capital; (ii) Acquisition Fees, and (iii) incentive fees based on our performance above specified hurdles. Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal. Borrowings We do not have any current plans to borrow money at the Parent Company level. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates. While we do not have any plans to borrow money at the Parent Company level, we borrow money within the underlying companies in which we have majority ownership. As of December 31, 2022, total loan outstanding at the underlying companies amounted to $90,619,555, of which $21,484,471 was the loan associated with Addison Corporate Center that was being held for sale as of December 31, 2022. Distributions to Stockholders We pay quarterly distributions to stockholders to the extent that we have income from operations available. Our quarterly distributions, if any, will be determined by our Board of Directors after a review and distributed pro-rata to holders of our shares; we declare distributions on a monthly basis, but pay each quarter. Any distributions to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make distributions if the amount of such distributions would exceed our annual accrued and received revenues, less operating costs. Distributions in kind are not permitted, except as provided in our Charter. We have elected to be treated as a REIT under the Code. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of the taxable income, we will either be subject to U.S. federal corporate income tax on our undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. We are also subject to tax on built-in gains we realize during the first five years following REIT election. Our DRIP provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the DRIP is permitted by the state in which the stockholders resides. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions. On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, our Board of Directors suspended regular quarterly distributions to our stockholders. However, on May 10, 2021, the Board of Directors reinstated the quarterly distributions after reassessing our cash flow and intends to continue such distribution so long as it is supported by the previous quarter’s income, but may increase or decrease the distribution accordingly . During the six months ended December 31, 2022, the Board approved the following quarterly dividends: Dividends Common Stock Preferred Stock During the Quarter Ended Per Share Amount Per Share Amount September 30, 2022 $ 0.105 $ 1,390,290 $ 0.375 $ 87,884 December 31, 2022 0.110 1,456,391 0.375 155,909 $ 0.215 $ 2,846,681 $ 0.750 $ 243,793 44 Table of Contents