Organization
MacKenzie Realty Capital, Inc. (the “Parent Company,” together with its subsidiaries as discussed below, the “Company,” “we,” “us,” or “our”) was an externally managed non-diversified real estate investment trust
(“REIT”), as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), that had elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment
Company Act”). As of December 31, 2020, we have withdrawn our election to be regulated as a BDC while continuing our REIT election for U.S. federal income tax purposes.
Withdrawal of our election to be regulated as a BDC did not affect our registration under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”), and we will continue to file periodic reports on
Form 10-K, Form 10-Q, and Form 8-K, as well as file proxy statements and other reports required under the Exchange Act. As a result of the withdrawal of our election to be regulated as a BDC, we are no longer treated as an investment company for
purposes of applying accounting principles generally accepted in the United States of America (“GAAP”).
We are advised by MacKenzie Real Estate Advisers, LP (the “Real Estate Adviser”) as to our real estate investments and by MCM Advisers, LP (the “Investment Adviser”; together the
“Real Estate Adviser” and the “Investment Adviser” are referred to as the “Advisers”) as to our securities portfolio. MacKenzie Capital Management, LP (“MacKenzie” or the “Administrator”) provides us with non-investment management
services and administrative services necessary for us to operate.
The Parent Company filed its initial registration statement in June 2012 with the Securities and Exchange Commission (“SEC”) to register the initial public offering (“IPO”) of 5,000,000 shares of its common stock.
The IPO commenced in January 2014 and concluded in October 2016. The Parent Company filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock. The second offering commenced
in December 2016 and concluded on October 28, 2019. The Parent Company filed a third registration statement with the SEC to register a public offering of 15,000,000 shares of its common stock that was declared effective by the SEC on October 31,
2019. The third offering commenced shortly thereafter and ended on October 31, 2020.
The Parent Company’s wholly owned subsidiary, MRC TRS, Inc., (“TRS”) was incorporated under the general corporation laws of the State of California on February 22, 2016, and operates as a taxable REIT subsidiary. TRS
started its operation on January 1, 2017, and the financial statements of TRS have been consolidated with the Parent Company’s consolidated financial statements beginning with the quarter ended March 31, 2017. On December 20, 2017, a wholly owned
subsidiary of TRS, MacKenzie NY Real Estate 2 Corp. (“MacKenzie NY 2”), was formed for the purpose of making certain limited investments in New York companies, and its financial statements have been consolidated with the Parent Company beginning
with the quarter ended March 31, 2021.
On May 20, 2020, the Parent Company formed an operating partnership, MacKenzie Realty Operating Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and consolidating our wholly-owned and
majority-owned subsidiaries within an entity that is able to offer tax-advantaged solutions to certain sellers.
The Operating Partnership first entered into a Contribution Agreement with a group of entities referred to as the Addison Group, owners of Addison Property Owner, LLC (“Property Owner”). The Parent Company owns 100%
of the Class B Limited Partnership units of the Operating Partnership. Property Owner owns a property known as the Addison Corporate Center. On June 8, 2020, Addison Group exchanged its ownership in Property Owner for Class A Limited Partnership
units of the Operating Partnership. Subsequent to the acquisition date, the Parent Company redeemed substantially all of the remaining Class A Limited Partnership units by issuing to each such Class A Limited Partner one share of the Company’s
common stock for each Class A Unit. As a result, the Company owns substantially all of the Operating Partnership.
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In March 2021, the Company together with its joint venture partners formed two operating companies: Madison-PVT Partners LLC (“Madison”) and PVT-Madison Partners LLC (“PVT”), to acquire and operate two residential
apartment buildings located in Oakland, California. The Company owns 98.45% and 98.75% of equity units of Madison and PVT, respectively. The joint venture partners own the remaining 1.55% and 1.25% equity units of Madison and PVT, respectively, and
also hold a carried interest in both companies.
Investment Objective
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 (as defined in Part III, Item 10 of this Annual Report on Form 10-K) review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such
determination and the basis thereof are contained in the minutes of our Board of Directors meetings.
We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities at significant
discounts to their net asset value.
Our Corporate Information
Our offices are currently located at 89 Davis Road, Suite 100, Orinda, CA 94563 and our telephone number is (925) 631-9100 or (800) 854-8357.
Investments Strategy
Following withdrawal of its election to be regulated as a BDC, the Parent Company’s underlying investment strategy is very similar to the strategy it has historically followed. The Parent Company
has and intends to continue to increase its control over its private investments, and to eventually consolidate those investments for financial reporting purposes. It will conduct many of its operations through the Operating Partnership. The
withdrawal of the BDC election will also allow the Parent Company to expand its investment pool to include real, physical assets, as opposed to only investment securities. The Parent Company believes that this expanded pool of potential investments
will allow access to risk-adjusted returns consistent with its investment objective, while allowing the Parent Company to maintain its REIT status.
We 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 Advisers’ 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 Advisers estimates to be the actual or potential value of the real estate.
The Company’s investment strategies since its inception have included making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing, tenant improvements
or other cash needs. Since entering the recent recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in one case so far, we have provided additional capital to the extent that we now own the majority of the
project (such as Addison Corporate Center). We may encounter future opportunities to provide needed cash, and, in such cases, we would seek to consolidate the portfolio company into our financial statements, which is a key reason for dropping our
BDC status.
When evaluating opportunities to buy properties, we look for opportunistic and value-add situations similar to our approach to targeting real estate securities, including unique situations and value-added
opportunities. We evaluate the broader market, the property’s position in the market, the needs our capital can address, and the track record of the sponsor or operator bringing the opportunity to us. We do not generally engage brokers, and the
majority of our properties were acquired in “off market” transactions.
We invest in mid-market properties that may be overlooked by institutions. We acquire mid-market properties that may be too small to
attract most institutions, and where we believe we can create long-term value for our stockholders utilizing the following investment strategies.
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The Company intends to continue its historical activities related to tender offers for shares of non-traded REITs in order to boost its short-term cash flow and to support its distributions, subject to the constraint
that such securities will not exceed 20% of our portfolio. The Company believes this niche strategy will allow it to pay 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. This strategy can boost cash-flow in two ways: (1) most such non-traded REITs pay regular cash distributions (even though COVID-19 prompted some to temporarily stop or cut back the
distributions); and (2) when such non-traded REIT shares are liquidated or sold and the Company realizes a profit from having purchased the shares at a discount to the underlying net asset value.
Types of Investments
We target the following real estate-related investments which may include equity interests in LLCs, tenancies-in-common, mortgages, loans, bonds, other real estate-related investment entities, or direct ownership of
real property. Since dropping our BDC status, we intend to purchase primarily majority interests in properties so that we can consolidate them into our financial statements. We may purchase non-controlling interests, but we intend that such
investments will constitute less than 20% of our portfolio. We do not invest in general partnerships or other entities that do not afford limited liability to their security owners. However, limited liability entities in which we invest may hold
interests in general partnerships, joint ventures, or other non-limited liability entities.
Investment Selection
Our Adviser’s investment team is responsible for all aspects of our investment process. The current members of the investment team are C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Angche Sherpa, and
Christine Simpson. The investment strategy involves a team approach, whereby potential transactions are screened by various members of the investment team.
Our process for acquiring targeted real estate typically involves three steps: (i) identifying assets of the type we may be interested in acquiring; (ii) evaluating the assets to estimate their value or potential
value to us, and (iii) either acquiring such assets directly or through our network of real estate partners. Different circumstances may require different procedures, or different combinations of procedures, and we adjust our acquisition strategy
to fit the circumstances. Nonetheless, the typical stages of our investment selection process are as follows:
Deal Generation/Origination
We source investments through long-standing relationships with real estate operators, developers, industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and
accountants, as well as current and former clients, portfolio companies and investors. Our Adviser’s goal is to establish relationships with successful operators with proven track records in each region in which we operate, and to grow and deepen
those relationships as they prove successful.
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Screening
In screening potential investments, the Adviser’s investment team utilizes a value-oriented investment philosophy and commits resources to managing downside exposure.
Due Diligence
In conducting due diligence, the Adviser uses publicly available information as well as information from its relationships with former and current management teams, investors, consultants, competitors and investment
bankers.
Our Adviser's due diligence typically includes:
Upon the completion of due diligence and a decision to proceed with an investment, the investment professionals leading the investment present the investment opportunity to
the Adviser's investment team, which then determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing
of the investment, as well as other outside third-party advisers, as appropriate. Any fees and expenses incurred by the Adviser to oversee due diligence investigations undertaken by third parties are subject to reimbursement by us, if not
otherwise reimbursed , which reimbursements are in addition to any management or incentive fees payable by us under the advisory agreements.
Monitoring
Our Adviser monitors our investments on an ongoing basis. Our Adviser has several methods of evaluating and monitoring the performance and value of the assets in which we invest, which include the following: