Executive Summary / Key Takeaways

• Strategic Pivot to Real Assets: MacKenzie Realty Capital, Inc. (MKZR) has fundamentally shifted its investment focus from a Business Development Company (BDC) model to a Real Estate Investment Trust (REIT) primarily investing in physical real estate assets, aiming to generate current income and capital appreciation through a blend of value-add, opportunistic, and invest-to-own strategies.
• Significant Portfolio Expansion and Development: The company has aggressively expanded its real estate portfolio, acquiring nine commercial and four residential properties, alongside two multi-family residential developments (Aurora at Green Valley and Blue Ridge at Suisun Valley), primarily in California and Georgia, signaling a robust growth trajectory in physical assets.
• Financial Headwinds and Liquidity Preservation: Despite a substantial 40.15% increase in rental and reimbursement revenues to $22.06 million in fiscal year 2025, MKZR reported a net loss of $23.97 million, driven by increased operating expenses, higher interest costs, and a significant $9.50 million impairment loss on the Main Street West Office Building. This led to the suspension of common stock dividends to preserve liquidity and fund ongoing developments.
• Competitive Landscape and Differentiated Approach: Operating in a highly competitive real estate market, MKZR differentiates itself through its diversified portfolio across commercial and residential sectors and its opportunistic acquisition approach, which contrasts with the specialized focus of larger REITs like Prologis (PLD), Realty Income (O), and Equity Residential (EQR).
• Outlook Focused on Development and Refinancing: The company's immediate future hinges on the successful completion and lease-up of its multi-family developments, particularly Aurora at Green Valley, which is already commencing leasing, and securing financing for Blue Ridge. Effective debt management and capital raising remain critical for executing its growth strategy amidst rising interest rates.

The Evolving Landscape of MacKenzie Realty Capital

MacKenzie Realty Capital, Inc. (MKZR) has undergone a significant transformation since its incorporation in 2012, evolving from a non-diversified closed-end management investment company to a Real Estate Investment Trust (REIT) with a primary focus on physical real estate assets. This strategic pivot, marked by the withdrawal of its Business Development Company (BDC) election on December 31, 2020, has allowed MKZR to broaden its investment scope, targeting a blend of value-add, opportunistic, and invest-to-own strategies across commercial and residential properties. The company aims to generate both current income and capital appreciation, emphasizing the acquisition of assets at discounts to their estimated value, often through off-market transactions.

The broader real estate market presents a complex backdrop for MKZR's strategy. Increased inflation, higher interest rates, and tightening monetary policies have become prevalent, impacting real estate asset values and increasing borrowing costs. The Federal Reserve's rate hikes in 2022 and 2023, followed by a pause and subsequent cuts in late 2024, have created a volatile interest rate environment. This directly affects REITs like MKZR, influencing financing costs and the ability to acquire new properties. Concurrently, the demand for specialized real estate, such as data centers driven by AI advancements, highlights emerging opportunities, while traditional sectors face competitive pressures.

In this dynamic environment, MKZR positions itself with a diversified portfolio, primarily concentrated in California and Georgia. This diversification across commercial office and multi-family residential properties is a key differentiator against more specialized REITs. While larger players like Prologis dominate industrial logistics and Realty Income focuses on net-lease retail, MKZR's approach allows for broader risk mitigation across various market cycles. However, its smaller scale compared to these industry giants can lead to higher operational costs and potentially limit bargaining power. Equity Residential, a major player in urban multifamily, represents a direct competitor in the residential segment, where MKZR's West Coast properties are often subject to rent control laws, limiting rental growth but providing a buffer during economic downturns.

Regarding technological differentiation, MKZR's operational framework relies on standard industry practices rather than proprietary, cutting-edge technology. The company outsources its information technology functions to a third-party managed service provider that adheres to the NIST Cybersecurity Framework, focusing on managed security services, vulnerability remediation, and data protection. For property valuation, MKZR utilizes an ARGUS model, a widely accepted tool in real estate for estimating future cash flows and fair values. While these are not unique technological moats, they represent a commitment to operational efficiency and robust risk management through established industry tools and expertise. The "so what" for investors is that MKZR prioritizes proven, reliable systems for its core operations, aiming for stability and efficiency in its asset management rather than high-risk, high-reward technological innovation.

Business Model and Strategic Initiatives

MKZR's business model is centered on the direct ownership and management of real estate, complemented by strategic investments in real estate-related securities. The company's portfolio, as of June 30, 2025, comprises nine commercial office properties and four residential apartment buildings, alongside two significant multi-family residential developments. These properties are strategically located, with a notable presence in California (Napa, Woodland, Fairfield, Suisun, Oakland, Concord, Los Angeles) and Georgia (Duluth).

The company's acquisition strategy is characterized by seeking opportunistic and value-add situations, often through off-market transactions, to acquire mid-market properties. This approach allows MKZR to target assets that may be overlooked by larger institutions, where it believes it can create long-term value through renovation, redevelopment, or repositioning. A prime example of this strategy is the acquisition of management interests and land from The Wiseman Company, LLC in May 2022, which created a captive pipeline for acquiring limited partnership interests in several Wiseman Partnerships. This led to the full acquisition and consolidation of properties like First Main, 1300 Main, Woodland Corporate Center Two, Main Street West, One Harbor Center, and Green Valley Medical Center through August 2024.

Beyond acquisitions, MKZR is actively engaged in development projects to create new value. The Aurora at Green Valley, a 72-unit multi-family residential community in Fairfield, California, commenced construction in September 2024. The clubhouse opened for pre-leasing in June 2025, and the first residential building was completed in July 2025, with leasing beginning in August 2025. The remaining two buildings were completed in September 2025, with leasing expected to commence shortly thereafter. This project was financed through $10 million of preferred capital and a $17.15 million construction loan from Valley Strong Credit Union. Another significant development is Blue Ridge at Suisun Valley, an 84-luxury multi-family unit community in Fairfield, California, for which the entitlement process is underway, with a goal to commence construction in spring 2026, subject to city approval and securing necessary financial resources.

The company also maintains a smaller segment of real estate-related investment securities, which is intended to be less than 20% of its total assets. This niche strategy involves tender offers for shares of non-traded REITs, aiming to boost short-term cash flow and support distributions. This approach seeks to generate cash flow from distributions and potential profits from purchasing shares at a discount to net asset value.

Financial Performance and Operational Highlights

MacKenzie Realty Capital's financial performance for the fiscal year ended June 30, 2025, reflects both significant growth in its core real estate operations and substantial challenges. The company reported a total rental, reimbursements, and other property income of $22.06 million, a notable increase from $15.74 million in fiscal year 2024. This 40.15% growth was primarily driven by the acquisition of the Green Valley Medical Center office building in August 2024 and a $3.00 million early lease termination income from a tenant at the Satellite Place Office Building in December 2024. This highlights the company's ability to expand its revenue base through strategic acquisitions and capitalize on specific property events.

However, the increase in revenue was accompanied by a rise in operating expenses. Property operating and maintenance expenses increased to $7.39 million from $6.52 million in the prior year, largely due to the expanded portfolio. Depreciation and amortization also saw a substantial increase of $4.28 million, reaching $11.43 million, attributed to the Green Valley Medical Center acquisition and write-offs related to the early lease termination at Satellite Place. Interest expense climbed to $8.52 million from $6.12 million, primarily due to additional mortgage notes payable for newly acquired properties and refinancing fees for Hollywood Apartments. The Main Street West loan, which defaulted in November 2024, also incurred higher interest charges under a forbearance agreement before its refinancing.

A significant event impacting profitability was the $9.50 million impairment loss recorded on the Main Street West Office Building. This impairment was a direct consequence of an early lease termination by the anchor tenant and a maturity default on the debt secured by the property. This underscores the inherent risks in real estate investments, particularly in a challenging market. Overall, the company reported a consolidated net loss of $23.97 million for fiscal year 2025, a substantial increase from a net loss of $11.22 million in fiscal year 2024. The net loss attributable to common stockholders was $27.34 million, or $18.66 per share, compared to $13.23 million, or $9.95 per share, in the previous year.

In terms of liquidity and capital resources, MKZR ended fiscal year 2025 with approximately $4.12 million in cash and cash equivalents, and restricted cash, a decrease from $13.08 million in fiscal year 2024. The company's principal cash demands include operating expenses, debt service, and dividends. To fund future investments and manage its balance sheet, MKZR plans to utilize proceeds from preferred equity offerings, future securities offerings, and cash flows from operations, alongside borrowings. A $10 million revolving line of credit with an affiliate was established in January 2025, with $9.59 million drawn as of June 30, 2025, primarily to bridge asset acquisition expenditures and debt refinancing. A secured promissory note of up to $3.27 million was also entered into in June 2025 to fund REIT share purchases.

A critical decision made by the Board of Directors on May 19, 2025, was the suspension of the regular quarterly dividend on common stock. This action was taken to preserve liquidity, enable further investments in properties and developments, and provide financial flexibility amidst the current economic climate, including the potential impact of new tariffs and the increased likelihood of a near-term recession. This move, while impacting common shareholders, reflects a strategic prioritization of long-term asset growth and financial stability.

Outlook and Risks

MacKenzie Realty Capital's outlook is largely tied to the successful execution of its development projects and its ability to manage debt and raise capital in a fluctuating economic environment. The Aurora at Green Valley multi-family community is nearing full completion, with the remaining two buildings expected to commence leasing shortly after their September 2025 completion. This project, with 72 units, represents a significant near-term revenue generation opportunity. The Blue Ridge at Suisun Valley development, an 84-unit luxury multi-family community, is in the entitlement phase, with construction targeted for spring 2026, contingent on city approval and securing financing. These developments are crucial for MKZR's growth and diversification into newer, potentially higher-yielding assets.

However, the company faces several pertinent risks. The real estate market remains highly competitive, making it challenging to identify attractive acquisition opportunities and potentially leading to higher prices and lower returns. The illiquidity of real estate investments could also hinder the company's ability to respond quickly to adverse market changes. Furthermore, MKZR's concentration of investments in California and Georgia exposes it to regional economic downturns. Inflationary pressures could continue to increase operating expenses and impact tenants' ability to pay rent, while rising interest rates could further elevate variable-rate debt costs, reducing cash available for distributions.

The company's reliance on debt financing, with total debt reaching $134.69 million as of June 30, 2025, exposes it to interest rate risk and the potential for foreclosure if cash flows are insufficient to cover loan payments. While MKZR utilizes a mix of fixed and floating rate financing, and has some interest rate hedging agreements, the increase in variable-rate borrowing costs has already impacted interest expense. The recent refinancing of the Main Street West loan, following a default, underscores the importance of proactive debt management.

Maintaining REIT qualification is also a continuous requirement, necessitating the distribution of at least 90% of its REIT taxable income. Failure to meet this, or other REIT requirements, would result in higher corporate taxes and reduced funds for distributions. Additionally, conflicts of interest with its external Advisers, whose agreements were not negotiated on an arms-length basis, present a governance risk. Unresolved issues related to unfunded warrants, where the holder asserts dividend rights disputed by the company, could also lead to future claims and impact financial results if dividend payments resume. The prior issuance of common shares under a dividend reinvestment program that may have violated securities laws also poses a contingent liability for rescission claims, potentially affecting cash balances.

Conclusion

MacKenzie Realty Capital is in a transformative phase, actively reshaping its portfolio towards income-producing real estate and strategic developments. The significant increase in rental revenue in fiscal year 2025 demonstrates the potential of its expanded asset base, particularly with new multi-family projects coming online. The company's strategic shift away from a BDC structure has opened avenues for direct real estate investment, allowing it to pursue value-add and opportunistic strategies that could unlock long-term capital appreciation.

However, the path to sustained profitability is marked by challenges, as evidenced by the recent net loss and the suspension of common stock dividends. The company's ability to navigate the current high-interest-rate environment, manage its debt obligations, and successfully complete and lease its development projects will be paramount. While MKZR's diversified portfolio offers a degree of resilience against sector-specific downturns, its smaller scale compared to industry leaders means it must execute its strategy with precision. The future value proposition for MKZR investors will hinge on the successful monetization of its development pipeline, prudent capital management, and the effective resolution of ongoing financial and operational challenges, ultimately demonstrating that its asset transformation can indeed lead to enhanced shareholder value.