10-K: MacKenzie Realty Capital Reports Wider Loss, Suspends Common Dividends

MacKenzie Realty Capital, Inc. reported a significantly wider net loss for fiscal year 2025, driven by increased expenses and an impairment loss, leading to the suspension of common stock dividends.

Summary

• Net loss attributable to common stockholders widened to $27.34 million for the fiscal year ended June 30, 2025, from $13.23 million in fiscal year 2024.
• Total operating expenses increased to $45.52 million in fiscal 2025 from $25.65 million in fiscal 2024, primarily due to higher depreciation, interest, and general & administrative costs.
• Rental and reimbursement revenues grew to $22.06 million in fiscal 2025 from $15.74 million in fiscal 2024, partly due to new acquisitions and a $3 million lease termination income.
• An impairment loss of $9.50 million was recorded on the Main Street West Office Building due to an early lease termination by an anchor tenant and debt maturity default.
• The Board of Directors suspended the regular quarterly dividend on common stock effective May 19, 2025, to preserve liquidity and provide financial flexibility.
• Cash and cash equivalents, and restricted cash decreased to $4.12 million as of June 30, 2025, from $13.08 million as of June 30, 2024.
• The company completed a 1-for-10 reverse stock split effective August 4, 2025, reducing outstanding common shares to 1,675,776 immediately after the split.
• New capital was raised through a registered direct offering of common stock and warrants ($4.80 million gross proceeds) and an ATM offering ($1.50 million gross proceeds) in fiscal 2025.
• The Aurora at Green Valley development project is progressing on schedule and on budget, with the clubhouse opened for pre-leasing in June 2025 and the first residential building completed in July 2025.
• The Main Street West loan, which was in default, was refinanced with a new $9.50 million loan from EverTrust Bank on June 6, 2025.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significantly widened net loss, substantial increase in operating expenses, a large impairment loss, and the suspension of common stock dividends. While there are positive developments in revenue growth and project progress, these are overshadowed by the financial deterioration and liquidity concerns, leading to a cautious outlook.

Positives

• Rental and reimbursement revenues increased significantly to $22.06 million in fiscal 2025, up from $15.74 million in fiscal 2024, partly driven by new acquisitions and a $3 million lease termination income.
• The Aurora at Green Valley development project is on schedule and budget, with pre-leasing commenced and the first residential building completed, indicating progress in value-add strategy.
• Successfully refinanced the Main Street West loan with EverTrust Bank for $9.50 million, resolving a maturity default and foreclosure proceedings.
• Secured a $10 million revolving line of credit with an affiliate, PRES, providing short-term liquidity for asset acquisition and debt refinancing.
• Common stock commenced trading on the Nasdaq Capital Market on November 11, 2024, enhancing visibility and accessibility to U.S. investors.
• Acquired Green Valley Medical Center in August 2024, adding another commercial property to the portfolio.

Negatives

• Net loss attributable to common stockholders significantly widened to $27.34 million in fiscal 2025, compared to $13.23 million in fiscal 2024.
• Total operating expenses increased substantially to $45.52 million in fiscal 2025 from $25.65 million in fiscal 2024.
• An impairment loss of $9.50 million was recorded on the Main Street West Office Building due to an early lease termination and debt default.
• The Board of Directors suspended the regular quarterly dividend on common stock effective May 19, 2025, citing financial review, economic climate, potential tariffs, and increased likelihood of recession.
• Cash and cash equivalents, and restricted cash decreased by $8.96 million, from $13.08 million to $4.12 million, indicating significant cash outflow.
• Investment income decreased significantly to $0.07 million in fiscal 2025 from $0.85 million in fiscal 2024, mainly due to decreased distributions from investments and interest income from cash deposits.
• Net unrealized loss on investments was $0.72 million in fiscal 2025, compared to a net unrealized gain of $0.86 million in fiscal 2024.
• The Satellite Place Office Building is only 29% occupied by 4 tenants, indicating significant vacancy.
• The Campus Lane Land development (Blue Ridge) is subject to city approval and securing necessary financial resources, with construction goal in spring 2026, indicating potential delays or funding challenges.
• There are unresolved issues related to dividend rights for unfunded warrants issued to a single institutional investor, which could lead to future claims.

Risks

• Real property investments are subject to various risks beyond control, including economic conditions, which could cause declines in operating revenues and/or property values.
• The market for real estate investments is highly competitive, potentially leading to increased investment prices or less favorable terms.
• Illiquidity of real estate investments could significantly affect the ability to respond to adverse changes and harm financial condition.
• Exposure to environmental liabilities could impact the value of real properties.
• May not obtain independent third-party appraisals or valuation reports on all investments, leading to uncertainty in value.
• Adverse economic conditions, particularly in concentrated geographic areas (California and Georgia), may negatively affect results of operations.
• Inflation may adversely affect financial condition and results of operations, especially on variable-rate debt and tenant's ability to pay rent.
• Success is materially dependent on attracting qualified tenants; vacancies or defaults could seriously harm operating results.
• Significant restrictions on transfer and encumbrance of investments subject to mortgage or other debt financing are expected.
• Possible risks associated with climate change, including new laws/regulations and physical impacts on properties.
• Future debt or capital stock issuances could dilute ownership interest and subject the company to restrictive covenants.
• No guaranteed cash flow; distributions from sources other than cash flow from operations reduce funds available for investments.
• May choose to pay dividends in own stock, requiring stockholders to pay income taxes in excess of cash dividends received.
• Investment and operational policies may change without stockholder consent, potentially increasing risk.
• Board of Directors can revoke REIT qualification without stockholder approval, leading to higher taxes.
• Future growth depends on ability to acquire real estate in competitive markets; lack of diversification increases dependence on individual investments.
• Difficulty in selling properties that no longer fit investment criteria or are impractical to lease/maintain.
• Dependence on Advisers and their key personnel for success; any adverse changes could hinder operating performance.
• Investments carried at estimated fair value, which involves uncertainty and subjective judgments.
• Judgments in applying accounting policies, and different estimates/assumptions, could result in changes to financial reporting.
• Cyber incidents or deficiencies in cybersecurity could negatively impact business operations, data, and relationships.
• Charter permits Board to issue stock with terms that may subordinate rights of common/preferred stockholders or discourage acquisitions.
• Rights of shareholders to recover claims against officers, directors, and Advisers are limited.
• Advisory Agreements were not negotiated on an arms-length basis and may not be as favorable.
• Conflicts of interest with Advisers and affiliates may result in investment decisions not in the best interest of stockholders.
• Reliance on good faith of Advisers, officers, and directors in resolving conflicts due to lack of specific conflict of interest policies.
• Use of mortgage and other debt financing increases expenses and risk of losing properties in foreclosure.
• High levels of debt or increases in interest rates could reduce cash available for distribution.
• High mortgage rates may make it difficult to finance or refinance properties, reducing acquisitions and cash flow.
• Required payments under bad boy carve-out guaranties could materially adversely affect business and financial results.
• Failure to remain qualified as a REIT would result in higher taxes and reduced cash available for stockholders.
• Complying with minimum required distributions and other REIT requirements may cause the company to forego attractive opportunities or liquidate investments.
• Stock ownership limit for REITs and in the Charter may inhibit market activity and restrict business combination opportunities.
• Dividends payable by REITs do not qualify for reduced tax rates, potentially making REITs less attractive.
• Prohibited transactions tax may subject the company to tax on gain from property sales and limit ability to dispose of properties.
• Adverse legislative or regulatory tax changes could reduce the market price of shares.
• Any future pandemic or similar threat could materially and adversely impact financial condition and operations.
• Previous issuances of common shares under the dividend reinvestment program may have violated securities laws, leading to potential rescission claims of approximately $865,000.
• Unresolved issues related to dividend rights of unfunded warrant holders could lead to material claims if dividend payments restart.

Future Outlook

The company intends to continue its strategy of investing in real estate assets and real estate-related debt and equity securities, with a focus on acquiring distressed properties and infusing funds to extract unrealized value. Future growth depends on the ability to acquire real estate investments in competitive markets and secure financing. The Aurora at Green Valley project is expected to commence leasing for its remaining two buildings shortly after September 2025. The Blue Ridge at Suisun Valley project aims to commence construction in spring 2026, subject to city approval and securing necessary financial resources. The company plans to fund future investments with proceeds from preferred equity offerings, future securities offerings, and cash flows from operations, but acknowledges challenges in raising sufficient funds due to rising interest rates.

Management Comments

• Management believed the acquisition of Management Companies and land from Wiseman was strategically important as it focuses the portfolio on our desired geographic area (Western United States) and created a captive pipeline of properties.
• The Board of Directors approved the suspension of the regular quarterly dividend on the Company's common stock effective immediately, following a review of the Company's financials, the current economic climate, the potential impact of new tariffs on demand for office and retail space, and the increased likelihood of a near-term recession. This decision was made to preserve liquidity, enable the Company to make further investments in its own properties and developments where prudent, and to provide financial flexibility as to near-term commitments; the suspension will remain in effect until further notice.

Industry Context

The company operates in a highly competitive real estate market, facing challenges from other REITs, private investment funds, and various investors. The broader economy is experiencing increased inflation, higher interest rates, and tightening monetary and fiscal policies, which have led to increased variable-rate borrowing costs and may adversely impact real estate asset values. Local rent control laws in West Coast multi-family residential properties restrict significant rent increases, providing a buffer against declining rents in a recession but potentially hindering improvements needed to compete with newer properties. Available office space is plentiful in the markets where the company's office properties are located, intensifying competitive challenges.

Comparison to Industry Standards

• The company's strategy of acquiring real estate securities at significant discounts to their net asset value, and investing in distressed real properties, aligns with opportunistic and value-add strategies common in the real estate investment industry, particularly for smaller-capitalization REITs or private funds seeking higher risk-adjusted returns.
• The company's external management structure, with advisory and administration agreements with affiliates, is a common model for REITs, though the filing notes that these agreements were not negotiated on an arms-length basis, which could be less favorable than industry best practices for independent management.
• The company's leverage strategy, utilizing mortgage and other debt financing, is standard for REITs to enhance returns, but high debt levels and exposure to variable interest rates (e.g., Prime rate, SOFR, U.S. Treasury yield) are common industry risks that the company attempts to mitigate through a mix of fixed/floating rates and hedging agreements.
• The company's compliance with REIT distribution requirements (distributing at least 90% of taxable income) is a standard practice to maintain tax-advantaged status, but this limits internal cash retention for investments, a common challenge for REITs compared to non-REIT corporations.

Corporate Governance

Legal Proceedings

• The Operating Partnership's subsidiary, Main Street West, defaulted on a loan with First Northern Bank of Dixon that matured on November 1, 2024. The Prior Lender initiated foreclosure proceedings, and a court-appointed receiver was appointed on January 28, 2025. The Company entered into a Forbearance, Settlement, and Release Agreement on March 25, 2025, paid down $5 million, and regained control in April 2025. The loan was paid off on June 6, 2025, with a new loan from EverTrust Bank.

Related Party Transactions

• Externally managed by MacKenzie Capital Management, LP (MacKenzie) under an Administration Agreement and advised by MCM Advisers, LP and MacKenzie Real Estate Advisers, LP (affiliates of MacKenzie) under advisory agreements.
• Incurred asset management fees of $3,449,487 in fiscal 2025 and $3,224,834 in fiscal 2024 to the Real Estate Adviser.
• Did not incur any incentive management fee for fiscal years 2025 and 2024.
• Reimbursed MacKenzie for administrative costs of $669,855 in fiscal 2025 and $756,733 in fiscal 2024.
• Reimbursed MacKenzie for transfer agent costs of $6,145 in fiscal 2025 and $66,267 in fiscal 2024.
• Wiseman Commercial, Inc. (a wholly owned subsidiary of the Real Estate Adviser) provides property management and leasing services to Wiseman Partnerships and 220 Campus Lane, receiving $771,574 in property management fees and $567,783 in leasing commissions in fiscal 2025.
• Wiseman Commercial also received $1,549,793 for direct operating costs and construction of tenant improvements in fiscal 2025.
• Offering costs in excess of $825,000 (excluding legal fees) for preferred stock offerings are reimbursable by the Advisers; $328,970 was reimbursed by Advisers as of June 30, 2024.
• Operating Partnership acquired GV Executive Center, LLC from Patterson Real Estate Services LP (PRES), an affiliate of the Advisers, for $8,703,127, paid through issuance of Series A preferred units.
• Issued 13,300 shares of common stock to Maxim Group LLC's affiliate in a private placement in connection with financial advisory services.
• Entered into a revolving line of credit agreement with PRES, an affiliate of the Adviser, for up to $10,000,000, with $9,588,000 outstanding as of June 30, 2025.
• Formed Innovate Napa, LLC, a wholly owned subsidiary, to enter into a master lease of a portion of the Main Street West Office Building to satisfy lender occupancy requirements for refinancing; lease payments are intercompany and eliminated in consolidation.

Stakeholder Impact

• Shareholders (Common Stock): Negatively impacted by the suspension of common stock dividends and a significantly widened net loss. The 1-for-10 reverse stock split may increase per-share price but does not change underlying value, and the unresolved warrant dividend issue creates uncertainty.
• Shareholders (Preferred Stock): Continue to receive quarterly dividends, with Series B preferred stock accruing dividends as an increase in liquidation preference, indicating a more stable return profile compared to common stock.
• Investors: Potential investors face increased risk due to the company's financial losses, high operating expenses, and reliance on external capital raises. The Nasdaq listing and various offerings aim to attract capital, but the overall financial performance presents a challenging investment case.
• Employees: No direct employees; operations are managed by Advisers and their affiliates. The clawback policy applies to executive officers, aligning their incentives with financial accuracy.
• Tenants: Impacted by property management and leasing services provided by an affiliate (Wiseman Commercial). The company's success is dependent on tenant financial stability, and economic downturns could lead to defaults or vacancies.
• Creditors: The company's high debt levels and increased interest expenses, along with a significant impairment loss, could raise concerns about debt service capacity, although successful refinancings and guarantees mitigate some immediate risks.

Next Steps

• Leasing of the remaining two residential buildings at Aurora at Green Valley is expected to commence shortly after September 2025.
• Goal to commence construction of Blue Ridge at Suisun Valley (Campus Lane Land Development) in spring 2026, subject to city approval and securing necessary financial resources.
• Evaluate financing alternatives to fund the development of the Blue Ridge at Suisun Valley project.
• Board of Directors will decide whether, and when, to reinstate the common stock DRIP.
• Continue to monitor and manage cybersecurity risks, relying on the MSP's expertise and reporting to management and the Board.
• Potentially acquire remaining limited partnership interests in Wiseman Partnerships via separate agreements in the future.

Key Dates

Recommendation

The company reported a significantly widened net loss, a substantial increase in operating expenses, and a material impairment loss on a property. The suspension of common stock dividends, explicitly stated to preserve liquidity and provide financial flexibility amidst a challenging economic climate and potential recession, signals significant financial distress. While revenue increased, it was insufficient to offset rising costs and losses. The high debt levels, coupled with a decrease in cash and cash equivalents, indicate liquidity concerns. The unresolved issue with unfunded warrants adds further uncertainty. Despite efforts to raise capital and refinance debt, the overall financial performance and management's actions (dividend suspension) point to a deteriorating financial position, making the stock a high-risk investment with negative near-term prospects.

Keywords

REIT, Real Estate Investment Trust, Commercial Real Estate, Residential Apartments, Property Development, SEC Filing, 10-K, Financial Performance, Dividend Suspension, Reverse Stock Split, Debt Refinancing, Asset Acquisition, Nasdaq Listing, Capital Raise, Risk Factors, Corporate Governance, Fair Value Measurement, Operating Partnership, California Real Estate, Georgia Real Estate