Overview

MacKenzie Realty Capital, Inc. is a real estate investment company that owns and manages various commercial and residential properties. The company previously operated as a business development company (BDC) but withdrew that status in 2020 and now operates as a real estate investment trust (REIT). As a REIT, the company is not subject to federal income taxes as long as it distributes at least 90% of its taxable income to shareholders annually.

Financial Performance

In the fiscal year ended June 30, 2024, MacKenzie generated $15.74 million in rental and reimbursement revenue, up from $15.11 million the prior year. This increase was mainly due to the acquisition of three new office buildings since June 2023, partially offset by the sale of one property. Investment income declined to $0.85 million from $11.31 million the prior year, primarily due to lower distributions from investments.

On the expense side, asset management fees increased slightly to $3.22 million from $3.00 million, reflecting the growth in total invested capital. Property operating and maintenance expenses decreased to $6.52 million from $9.03 million, largely due to the sale of one property. Depreciation and amortization rose to $7.15 million from $5.27 million, driven by the new property acquisitions. Interest expense declined to $6.12 million from $7.10 million, mainly from the payoff of debt related to the sold property.

Overall, MacKenzie reported a net realized loss of $3.02 million on the sale of investments compared to a $0.66 million gain the prior year. The company also recorded a $0.86 million net unrealized gain on its investment portfolio versus a $10.28 million unrealized loss the prior year.

Strengths and Weaknesses

A key strength of MacKenzie is its diversified portfolio of commercial and residential real estate properties. The company owns eight commercial office buildings and four apartment communities across California and Georgia. This diversification helps mitigate risk and provides a stable stream of rental income.

Another strength is MacKenzie’s focus on acquiring properties at discounted valuations and extracting unrealized value through active management. This value-oriented investment approach has allowed the company to generate attractive returns for shareholders over time.

However, a weakness is the company’s exposure to rising interest rates, which have increased its borrowing costs and could potentially impact property values. The recent economic slowdown and uncertainty around the return to office work also pose challenges for the company’s commercial properties.

Additionally, MacKenzie’s reliance on capital raising through preferred stock offerings to fund growth and acquisitions creates some uncertainty around its ability to consistently access capital markets. The company’s small size and limited trading liquidity on the OTCQX exchange may also make it less attractive to some investors.

Outlook

Looking ahead, MacKenzie’s management is focused on continuing to grow the company’s real estate portfolio through strategic acquisitions, while also exploring opportunities to develop new multi-family residential communities on its vacant land holdings. The company is also in the process of applying for a new line of credit at the parent company level, which should provide additional financial flexibility.

However, the uncertain economic environment and rising interest rate environment present headwinds that could impact the company’s financial performance and ability to execute on its growth plans. Maintaining high occupancy levels and controlling operating costs will be critical, especially for the commercial properties.

Overall, MacKenzie appears to be navigating a challenging market environment reasonably well, but investors should closely monitor the company’s ability to generate consistent cash flow, manage its debt, and capitalize on new investment opportunities. The company’s transition to a REIT structure provides some advantages, but it will need to continue demonstrating the ability to create value for shareholders over the long term.