Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements by MacKenzie Realty Capital, Inc. contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, future
events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend,"
"expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For a discussion of
factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading "Risk Factors" above.
We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default
rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result
of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Overview
We are an externally managed non-diversified closed-end management investment company. We are currently treated as a BDC under the 1940 Act, but our Board of Directors has recommended to our shareholders that we
withdraw our election to be regulated as a BDC. We generally invest in equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. Our objective is 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, which means 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.
We are managed by the Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
At our board meeting on August 28, 2020, our Board of Directors approved the proposal to withdraw of our BDC election, while continuing our REIT status. Therefore, on October 23, 2020, our stockholders will be asked to
approve the withdrawal of our BDC election. If this proposal is approved, the Company will, effective upon receipt by the SEC of the Company’s application for withdrawal, no longer be regulated as a BDC or subject to the regulatory provisions of the
1940 Act.
Investment income
We generate revenues in the form of capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we
may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection
with our investments and recognized as earned.
Expenses
Our primary operating expenses include the payment of: (i) base management fees and investment advisory fees (which include the Portfolio Structuring Fee) to the Adviser; (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 Adviser for its work in identifying, evaluating,
negotiating, closing, monitoring and servicing our investments the Investment Advisory Agreement . Our expenses must be billed to and paid by us, except that a sponsor may be reimbursed for actual cost of goods
and services used by us and certain necessary administrative expenses. We bear all other expenses of our operations and transactions, including:
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•
the cost of calculating our NAV, including the cost of any third-party valuation services;
•
the cost of effecting sales and repurchases of our shares and other securities;
•
interest payable on debt, if any, to finance our investments;
•
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;
•
transfer agent and safekeeping fees;
•
fees and expenses associated with marketing efforts;
•
federal and state registration fees, any stock exchange listing fees in the future;
•
federal, state and local taxes;
•
Independent Directors' fees and expenses;
•
brokerage commissions;
•
fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums;
•
direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff;
•
fees and expenses associated with independent audits and outside legal costs;
•
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
•
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses incurred by
MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of
our chief compliance officer and our chief financial officer and any administrative support staff.
In addition, we will bear organization and offering expenses in connection with our current public offering up to $1,650,000. Any additional amounts with respect to shares being sold pursuant to the third public
offering will be paid by our Adviser except to the extent the full 10.0% in broker fees are not incurred. In such case, the difference will be available to be paid or reimbursed by the Company to brokers for marketing expenses or other non‑cash
compensation.
Critical Accounting Policies
In addition to the discussion below, our critical accounting policies are discussed in Note 2 of our consolidated financial statements, which are part of this Annual Report beginning on page F-1.
Revenue Recognition
Distributions received from investments are evaluated by management and recorded as dividend income or a return of capital (reduction of investment) on the ex-dividend date. Operational dividends or distributions
received from portfolio investments are recorded as investment income. Distributions resulting from the sale or refinance of an investee's underlying assets are compared to the estimated value of the remaining assets and are recorded as a return of
capital or as investment income as appropriate.
Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the
investment. Investments are disposed of on a first-in, first-out basis. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized
gains or losses.
Fair Value Measurements
GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observables used in measuring investments at fair value. Market price is impacted by a number of factors,
including the type of investment and the characteristics specific to the investment. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of
market price observables and a lesser degree of judgment used in measuring fair value.
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Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level I – Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities.
The Company does not adjust the quoted price for these investments even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Level II – Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and
model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.
Level III – Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management
using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable
securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due
to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had an active market for these investments existed.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement, in its entirety, requires judgment and considers factors specific to the investment.
Valuation of Investments
The Company's consolidated financial statements include investments that are measured at their estimated fair values in accordance with GAAP. Our valuation procedures are summarized below:
Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited
volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may value securities that do not trade on a national exchange by using published secondary market trading information. When doing so,
we first confirm that GAAP recognizes the trading price as the fair value of the security.
Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the
Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial portion of our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment
professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each
investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third‑party valuation firms. The recommendation of fair value will generally be based on the following factors, as
relevant:
•
the nature and realizable value of any collateral;
•
the portfolio company's ability to make payments;
•
the portfolio company's earnings and discounted cash flow;
•
the markets in which the issuer does business; and
•
comparisons to publicly traded securities
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Securities for which market data is not readily available or for which a pricing source is not sufficient may include the following:
•
private placements and restricted securities that do not have an active trading market;
•
securities whose trading has been suspended or for which market quotes are no longer available;
•
debt securities that have recently gone into default and for which there is no current market;
•
securities whose prices are stale;
•
securities affected by significant events; and
•
securities that the Adviser believes were priced incorrectly.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements will express the uncertainty of such valuations, and any change in such
valuations, on our consolidated financial statements.
Portfolio Investment Composition
The following table summarizes the composition of our investments at cost and fair value as of June 30, 2020 and 2019:
June 30, 2020
June 30, 2019
Asset Type
Cost
Fair Value
Cost
Fair Value
Publicly Traded Companies
$
8,454,348
$
7,244,654
$
2,186,682
$
2,151,006
Non Traded Companies
42,474,614
32,808,076
33,844,099
35,641,290
LP Interests
53,713,785
53,618,425
61,157,573
65,413,799
Investment Trust
49,901
33,990
49,901
39,053
Total
$
104,692,648
$
93,705,145
$
97,238,255
$
103,245,148
Determination of NAV
We determine the NAV of our investment portfolio at the end of each quarter by subtracting our total liabilities from the fair value of our gross assets. We value our assets and determine our NAV consistent with GAAP
and the 1940 Act, and report our NAV in our periodic reports filed with the SEC under the 1934 Act. Our valuation procedures are summarized above under the “Critical Accounting Policies” section.
Our NAV as of June 30, 2020, was $8.04 per share compared to $9.44 per share at June 30, 2019, a $1.40 per share decrease of approximately 14.8%. The net
decrease was due to (i) net unrealized loss of $1.39 per share, and (ii) a dividend to stockholders of $0.45 per share (on a weighted average basis). The decreases were partly offset by increases resulting from (i) net investment income of $0.28 per
share, (ii) net realized gain on sale of investments of $0.15 per share, and (iii) redemption of shares below NAV resulting in gain of $0.01 per share.
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 June 30, 2020. In addition, some of the companies in which we
have invested have cancelled their quarterly dividends and distributions for the current and future quarters. While these cancellations did not have a significant impact on the Company’s total investment income for the quarter ended June 30, 2020,
the Company anticipates these cancellations will have a larger impact in 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.
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MacKenzie and our Adviser 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.
Investment income
Investment income is made up of dividends, distributions from operations, distributions from sales/capital transactions, interest and other investment income. Distributions from sales and capital transactions are
treated as realized gain from capital transactions for the purposes of calculating the subordinated advisory fees.
Dividend and distribution income:
Dividend and distribution income for Fiscal 2020 was $8.38 million compared to $11.51 million for Fiscal 2019. This decrease of $3.13 million or 27.2% was due to decreases in distribution income from sales and
liquidating transactions and dividend income during Fiscal 2020. The decreases were partly offset by an increase in distribution income from operations. During Fiscal 2020, the Company received distribution income from sales and liquidating
transactions of $1.70 million compared to $6.07 million during Fiscal 2019, resulting in a decrease of $4.37 million. During Fiscal 2020, the Company received total dividends of $2.06 million compared to $2.32 million during Fiscal 2019, resulting in
a decrease of $0.26 million. During Fiscal 2020, the Company received $4.62 million of distribution income from operations compared to $3.12 million during Fiscal 2019, resulting in an increase of $1.50 million.
Dividend and distribution income for Fiscal 2019 was $11.51 million compared to $6.52 million for Fiscal 2018. This increase of $4.99 million or 76.5% was attributed two factors; (i) larger amounts of sales
distributions received during Fiscal 2019 and (ii) an increase in our investment portfolio since June 30, 2018. During Fiscal 2019, the Company received sales and liquidating distributions of $6.07 million from six investments compared to $2.80
million from seven investments during Fiscal 2018, resulting in additional $3.27 million of sales distribution income in Fiscal 2019. The remaining increase of $1.72 million was due to a net increase in our overall investment portfolio by $33.72
million (excluding the decrease in debt securities) in cost basis since June 30, 2018.
Interest and other income:
Interest and other income for Fiscal 2020 and 2019 remained comparable at $0.35 million and $0.37 million, respectively.
Interest and other income for Fiscal 2019 and 2018 were $0.37 million compared to $0.46 million, respectively. This decrease of $0.09 million was mainly due to maturity of a debt security towards the end of Fiscal
2018. The debt security earned interest for most of Fiscal 2018.
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Operating Expenses
Base management fee:
The base management fee for Fiscal 2020 was $2.55 million compared to $2.21 million for Fiscal 2019. The increase of $0.34 million was due to the increase in the Gross Invested Capital during Fiscal 2020. The Gross
Invested Capital as of June 30, 2020 was $128.61 million compared to $109.26 million as of June 30, 2019.
The base management fee for Fiscal 2019 was $2.21 million compared to $1.73 million for Fiscal 2018. The increase was due to the increase in the Gross Invested Capital during Fiscal 2019. The Gross Invested Capital as
of June 30, 2019 was $109.26 million compared to $84.96 million as of June 30, 2018.
Portfolio structuring fee :
The portfolio structuring fee for Fiscal 2020 was $0.59 million compared to $0.71 million for Fiscal 2019. The decrease of $0.12 million or 16.9% was due to smaller amount of capital raised during Fiscal 2020. During
Fiscal 2020, the Company issued new shares with total gross proceeds of $19.51 million (excluding the DRIP shares) as compared to $23.24 million (excluding the DRIP shares) during Fiscal 2019
The portfolio structuring fee for Fiscal 2019 and 2018 remained comparable at $0.71 million and $0.69 million, respectively. The fee remained comparable as the gross proceeds from new shares issued (excluding the DRIP
shares) during Fiscal 2019 and 2018 remained comparable at $23.24 million and $23.01 million, respectively.
Subordinated incentive fee:
Subordinated incentive fees are calculated in accordance with the Investment Advisory Agreement. The subordinated incentive fee has two parts—the Income Fee and the Capital Gains Fee. The Capital Gains Fee is based on
realized gains including distributions received from sales/capital transactions and the Income Fee is based on net investment income.
There was neither Income Fee nor the Capital Gains Fee for Fiscal 2020, as the net investment income for Fiscal 2020 and the cumulative realized capital gains as of June 30, 2020 were below the threshold of 7% of
Contributed Capital per annum.
There was no Income Fee for Fiscal 2019, as the net investment income for Fiscal 2019 was below the threshold of 7% of Contributed Capital per annum. The Capital Gains Fee for Fiscal 2019 was $1.79 million as the
cumulative realized capital gains as of June 30, 2019, were over the threshold of 7% of Contributed Capital per annum.
The Income Fee and the Capital Gains Fee for Fiscal 2018 were $0.28 million and $0.81 million, respectively. As of June 30, 2018, the net investment income from the Effective Date of the amended investment advisory
agreement through June 30, 2018, together with the cumulative net realized gains exceeded the threshold of 7% of the Company’s Contributed Capital per annum resulting in the Income Fee and Capital Gains Fee for that period.
Administrative cost and Transfer agent reimbursements:
Costs reimbursed to Mackenzie for Fiscal 2020 and 2019 were $0.68 million and $0.57 million, respectively. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred
by MacKenzie since June 30, 2019, as a result of increase in the Company’s operating activities.
Costs reimbursed to Mackenzie for Fiscal 2019 and 2018 were $0.57 million and $0.43 million, respectively. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred
by MacKenzie since June 30, 2018, as a result of increase in the Company’s operating activities.
Effective November 1, 2018, transfer agent services are also provided by MacKenzie in-house and the costs incurred by MacKenzie in providing the services are reimbursed by the Company. No fee (only cost reimbursement)
is being paid by the Company to MacKenzie for this service, but the Company is reimbursing MacKenzie for the cost of certain software purchased to implement the service. This service was previously provided by a third party and the cost incurred were
expensed under other general and administrative expenses.
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Transfer agent cost reimbursement paid to MacKenzie for Fiscal 2020 was $0.08 million. Transfer agent cost reimbursement paid to MacKenzie for Fiscal 2019 was $0.02 million and transfer agent service fees paid to the
third party for Fiscal 2019 during the period MacKenzie did not provide the service was $0.03 million. Transfer Agent services fees paid to the third party for Fiscal 2018 was $0.04 million.
Amortization of deferred offering costs:
Amortization of deferred offering costs for Fiscal 2020 and Fiscal 2019 were $0.88 million and $0.56 million, respectively. The increase of $0.32 million or 57.1% was primarily due to amortization of the remaining
unamortized deferred offering costs relating to the second public offering after the offering concluded 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.
Amortization of deferred offering costs for Fiscal 2019 and Fiscal 2018 were $0.56 million and $0.37 million, respectively. The increase of $0.19 or 51.4% was primarily due to increase in the offering costs during
Fiscal 2019. Deferred offering cost incurred during Fiscal 2019 was $0.71 million as compared to $0.42 million during Fiscal 2018.
Other operating expenses:
Other operating expenses includes professional fees, directors’ fees, legal expenses, audit fees, printing and mailing and other general and administrative expenses. Other operating expenses for Fiscal 2020 and 2019
were $0.48 million and $0.40 million, respectively. The increase of $0.08 million or 20.0% was mainly due to increases in the Company’s professional fees. The Company incurred additional professional fees during Fiscal 2020 in the process of
restructuring and taking control of one of its investments.
Other operating expenses includes professional fees, directors’ fees, legal expenses, audit fees, printing and mailing and other general and administrative expenses. Other operating expenses for Fiscal 2019 and 2018
remained comparable at $0.40 million and $0.44 million, respectively.
Net realized gain on sale of investments
Total net realized gains for Fiscal 2020 was $1.80 million realized from sales and liquidations of three non-traded REIT securities with realized gains of $0.20 million, three limited partnership interests with net
realized gains of $0.41 million and four publicly traded securities with realized gains of $1.19 million.
Total net realized gains for Fiscal 2019 was $1.20 million realized from sales and liquidation of twelve non-traded REIT securities with net realized gains of $3.24 million. The realized gains were offset by a
realized loss of $2.03 million from sales of twenty-one publicly traded securities and $0.01 million from the liquidation of four limited partnership interests.
Total net realized gains for Fiscal 2018 was $2.69 million realized from (i) sales and liquidation of eight non-traded REITs with net realized gains of $3.06 million, and (ii) sales and liquidation of four
partnership interests with net realized gains of $0.53 million. The realized gains were offset by a realized loss of $0.84 million from sales of twenty-one publicly traded securities and $0.06 million from the liquidation of Coastal Realty Business
Trust, Series H2-A.
Net unrealized gain (loss) on investments
During Fiscal 2020, the Company recorded net unrealized loss of $16.99 million, which were net of the reclassification adjustment of $1.19 million of realized gains. The reclassification adjustment was the
accumulated unrealized gains as of June 30, 2019, that were realized during Fiscal 2020. Accordingly, the net unrealized loss excluding the realized gains reclassification adjustment was $15.80 million, which resulted from fair value depreciations
of $11.42 million of non-traded REIT securities, $3.17 million of limited partnership interests and $1.21 million of publicly traded securities. The significant declines in fair value during Fiscal 2020 were mainly due to the COVID-19 pandemic
resulting in steep declines in certain domestic stock market segments and in the traded prices for other financial assets as discussed above.
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During Fiscal 2019, the Company recorded net unrealized loss of $3.96 million, which were net of the reclassification adjustment of $2.40 million of realized gains. The reclassification adjustment was the accumulated
unrealized gain as of June 30, 2018, that was realized during Fiscal 2019. Accordingly, the net unrealized loss excluding the realized gains reclassification adjustment were $1.56 million, which resulted from fair value depreciation of $2.05
million of limited partnership interests and $0.03 million of publicly traded securities offset by fair value appreciation of $0.52 million of non-traded REIT securities. The large fair value depreciation in limited partnership interests mostly
resulted from distributions of sales proceeds by two partnerships (The Weatherly, LTD and The Weatherly Building, LLC) following the sales of underlying properties. The Company recorded $3.3 million of distribution income from sales transactions,
which is a part of the investment income discussed above, from these two partnerships during Fiscal 2019.
During Fiscal 2018, the Company recorded net unrealized gains of $5.85 million, which were net of the reclassification adjustment of $1.91 million of realized gains. The reclassification adjustment was the
accumulated unrealized gain as of June 30, 2017, that was realized during Fiscal 2018. Accordingly, the net unrealized gains excluding the realized gains reclassification adjustment were $7.76 million, which resulted from fair value appreciation of
$5.19 million of limited partnership interests and $2.59 million of non-traded REIT securities offset by fair value depreciation of $0.02 million of publicly traded securities.
Income tax provision (benefit)
The Parent Company did not record any income tax expenses for Fiscal 2020, 2019, or 2018, as we have elected to be treated as a REIT for tax purposes beginning with the tax year ended December 31, 2014. As a REIT, the
Parent Company 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.
The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2019, 2018, and 2017. Therefore, the Company did not incur any tax expense or excise tax for
those periods. In addition, during tax year ended December 31, 2019, we intend to pay dividends sufficient to avoid incurring income taxes. Therefore, the Company did not record any income tax provisions during the years ended June 30, 2020, 2019,
and 2018.
The income tax provision (benefit) amounts in the consolidated statements of operation for the years ended June 30, 2020, 2019 and 2018, relate to the Company’s built-in gain tax adjustments and TRS’ income tax
provisions as follows:
Year Ended
June 30, 2020
June 30, 2019
June 30, 2018
MacKenzie Realty Capital, Inc - built-in gain tax adjustments
$
-
$
(13,348
)
$
(3,292
)
MRC TRS, Inc - income tax expenses
-
-
6,723
Total Income Tax Provision (Benefit)
$
-
$
(13,348
)
$
3,431
The built-in gain tax adjustment amounts are the differences between the actual and the estimated tax liabilities on the built-in gains realized during the year. Prior to the effective date of its REIT election, the
Parent Company had net unrealized built-in gains of $239,595, for which the Parent Company recorded an estimated tax liability of $95,431 as of December 31, 2013. Accordingly, in each subsequent period, the Parent Company only recorded the difference
between the actual and estimated tax on the built-in gains it realized during the year as income tax expense or benefit. All unrealized built-in gains after December 31, 2018 were not taxable as the five-year period following the REIT election date
ended on December 31, 2018. Therefore, the remaining deferred tax liabilities of $13,348 on the unrealized built-in gains were reversed as of June 30, 2019.
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TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, for the years ended June 30, 2020 and 2019, TRS did not have any taxable income; therefore, TRS did
not record any income tax provisions. For the year ended June 30, 2019, it recorded an income tax provision of $6,723.
Liquidity and Capital Resources
Capital Resources
We offered to sell up to $150 million of shares under our second public offering which ended on October 28, 2019. In September 2019, we filed our third registration statement with
the SEC for the public offering of 15 million shares with total potential gross proceeds of $153.75 million. The third registration statement was declared effective by the SEC on October 31, 2019 and the public offering commenced shortly thereafter.
As of June 30, 2020, the Company has raised total gross proceeds of $118.88 million from the issuance of shares under three public offerings, $42.46 million from the IPO, which concluded in October 2016, and $67.99 million from the second public
offering and $8.43 million from our third public offering. 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 June 30, 2020, we have used $9.46 million to
repurchase shares under the Company’s share repurchase program. We do not have any current plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised from our third 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. We currently do not have any plans to borrow money on a long-term basis or issue debt securities; however, 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. As of June 30, 2020, we were selling our shares on a continuous basis at a price of $10.25 which may be below NAV per share from time to time, as approved by our
stockholders.
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The maximum amount of such
borrowing is limited by the 1940 Act.
Our primary uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (from investment income and realized capital gains), making payments to any lenders or senior
security holders, paying operating expenses. If all shares registered in our current public offering are sold, we will receive investable cash totaling approximately $133.76 million, of which approximately $7.37 million has been received as of June
30, 2020.
The Company finished the quarter ended June 30, 2020 with substantial liquidity, including $8.96 million in cash and cash equivalents, and only $0.94 million of liabilities.
However, the Company has historically relied upon distributions and capital gains from its investments to fund dividends. During and following the outbreak of COVID-19, we do not believe we can rely on our traditional sources of cash flow. Therefore,
in anticipation of uncertain future economic conditions, our board of directors discontinued dividends starting March 2020 and share redemptions starting May 2020. The Company intends to continue to qualify as a REIT and to meet the associated
testing requirements, including paying out at least 90% of its taxable income.
Cash Flows:
Fiscal 2020
For Fiscal 2020, we experienced a net increase in cash of $7.68 million. During this period, we generated cash of $9.41 million from our financing activities and used $1.73 million
in our operating activities.
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The net cash outflow of $1.73 million from operating activities was primarily due to the cash outflow of $45.08 million from purchases of investments offset by cash inflows of $8.01 million from sales of investments,
$31.37 million from distributions received from our investments that are considered return of capital and $3.97 million from investment income, net of the Company’s operating expenses.
The net cash inflow of $9.41 million from financing activities resulted from the sale of shares under our second and third public offering with gross proceeds of $18.93 million (adjusted for $0.58 million of decrease
in capital pending acceptance) offset by cash outflows of $4.53 million from payments of cash dividends, $3.19 million from share redemptions, and $1.80 million from payments of selling commissions and fees.
Fiscal 2019
For Fiscal 2019, we experienced a net decrease in cash of $7.16 million. During this period, we generated $15.06 million of cash from our financing activities and used $22.22 million in operating activities.
The net cash outflow of $22.22 million from operating activities was primarily due to the cash outflow of $107.88 million from purchases of investments offset by cash inflows of $62.87 million from sales of
investments, $19.02 million from distributions received from our investments that are considered return of capital and $3.77 million from investment income, net of the Company’s operating expenses.
The net cash inflow of $15.06 million from financing activities resulted from the sale of the Company’s shares under the second public offering with gross proceeds of $23.27 million (adjusted for the $0.02 million of
change in capital pending acceptance) offset by cash outflows of $2.37 million from share redemptions, $3.79 million from payments of cash dividends and $2.05 million from payment of selling commissions and fees.
Fiscal 2018
For Fiscal 2018, we experienced a net decrease in cash of $3.41 million. During this period, we generated $15.23 million of cash from our financing activities and used $18.64 million in operating activities.
The net cash outflow of $18.64 million from operating activities was primarily due to the cash outflow of $79.22 million from purchases of investments offset by cash inflows of $39.60 million from sales of investments,
$17.19 million from distributions received from our investments that are considered return of capital and $3.79 million from investment income, net of the Company’s operating expenses.
The net cash inflow of $15.23 million from financing activities resulted from the sale of the Company’s shares under the second public offering with gross proceeds of $21.84 million (adjusted for the $1.16 million of
change in capital pending acceptance) offset by cash outflows of $1.45 million from share redemptions, $2.98 million from payments of cash dividends and $2.18 million from payment of selling commissions and fees.
Contractual Obligations
We have entered into two contracts under which we have material future commitments, the Advisory Agreement, under which the Adviser serves as our investment adviser, and 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 (after the up-front payment of the portfolio structuring fee during the IPO) are (i) a percentage of the value of our Gross Invested Capital; and (ii) incentive fees based on our income and our performance above specified
hurdles (except in the year of liquidation). Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it is liable for any
expenses we incur as a result of such withdrawal.
We have entered into an agreement with MacKenzie, the Investor Service Agreement, effective November 1, 2018. Pursuant to the agreement, transfer agent services are provided by MacKenzie in-house and the costs incurred
by MacKenzie in providing the services are reimbursed by the Company. No fee (only cost reimbursement) is paid by the Company to MacKenzie for this service.
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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 or issue preferred securities. If we do borrow money, we 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.
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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.