Alternative Asset Trust Quarterly Report: June 30, 2015


The MacNicol Alternative Asset Trust is a multi-strategy, alternative investment platform designed to generate positive and uncorrelated returns against the public stock and bond markets. The Trust, through its underlying limited partnerships, is invested in private real estate and mortgages, private equity, high yield bonds and multi-strategy hedge funds. Combined, the Alternative Trust is invested in more than 150 separate real estate projects, mortgages, hedge funds and private securities. The advantage of combining different alternative asset classes and high yield investments into one Fund include tremendous diversification, enhanced liquidity, and a more predictable and less volatile pattern of returns when compared against the performance of the individual asset classes themselves.


Alternative Trust Performance Review: The goals of the Alternative Trust are to generate positive “real” returns (after-taxes and inflation) each year, and to generate annualized nominal returns of 6%-8% over rolling five-year periods. We are pleased to report that as of June 30, 2015 the Trust (E Class)  has met its primary goals by generating positive calendar-year returns that have exceeded inflation, while delivering  annual returns of  10.7% from inception.


Second Quarter Highlights


During the second quarter of 2015 ending June 30th, the Alternative Trust increased in value by 12% driven by the successful Initial Public Offering (IPO) of Shopify Inc. of Ottawa which rose by approximately 50% on its first day of trading. As private investors in the company, the Emergence Fund (and the Trust) are subject to a six-month “lock up” of its notional Shopify shares. Shopify is now subject to the day-to-day ups and downs of a public company, and hence we are expecting greater than normal volatility in the Alternative Trust and the Emergence Fund at least through this year.


For the past 12 months, the Trust returned 27.1% with strong contributions coming from private equity, real estate and hedge funds. Looking forward, we are anticipating positive returns and more liquidity from the Trust’s private equity holdings (see Emergence Fund commentary, page 7),  and continued steady results from the Trust’s real estate holdings and hedge funds.


North American Private Real Estate


The Alternative Asset Trust invests in North American private real estate through its MacNicol 360 Degree Realty Income Fund holdings. The “360 Fund” is a private real estate fund focussing on value-added projects in the United States and Canada. The Fund

invests in real estate projects and mortgage funds through an expanding number of carefully selected operators and sponsors. These partners are chosen for their high degree of local knowledge and experience in deal sourcing, finance, construction, and property

management. Through its partners, the Trust has exposure to more than 120 separate real estate projects and six asset classes across North America. The chart below highlights the regions of North America in which our real estate projects are located. The overall strategy is to invest in the fastest growing regions of the United States including Texas, Florida, Georgia, Phoenix, Las Vegas and California.


360 Fund Second Quarter Highlights: For the second quarter of 2015, the 360 Degree Fund (D Class) gained 2.1% in USD terms. For the past 12 months, the 360 Fund is ahead by 6.4% in USD terms and 23.1% in Canadian dollar terms. The $USD gains were a combination of an increase in the valuations of our multifamily portfolio managed by the Carroll Organization of Atlanta, along with gains in the Fund’s US office exposure through its investment with Rockwood Capital of New York (Fund IX).


Real Estate Portfolio Activity


During the second quarter of 2015, the 360 Fund made additional investments into JCR Fund III of Denver, CO. JCR specializes in restructuring “middle-market” commercial mortgage loans, which are loans valued between $5 million and $20 million in size. Many of these loans were originated during the 2002-2007 real estate boom and the maturing mortgages are above the value of the underlying buildings. In these cases, JCR’s goal is to purchase the mortgages at a discount from the lenders and to then work with the owners to restructure the mortgage and to maximize the value of the buildings for an exit sale. Our investment in JCR Fund II continues to perform very well with a 1.23X equity multiple to date, and more than 60% of our capital returned in a two-year period.


During the second quarter, the 360 Fund also added to its investment into a new sponsor-level investment with Ameritus Real Estate Investment Management of Chicago. Ameritus is a value-add acquirer and manager of Class “B” Office properties primarily within the downtown “loop” area of Chicago. Ameritus specializes in renovating and re-leasing historic buildings including 230 West Huron Drive seen in the photograph to the left. Most recently, Ameritus completed the acquisition of a portfolio of four creative loft-style office assets in the highly desirable River North neighbourhood of Chicago. The assets offers returns and upside through the renovation of 180 W. Washington and a significant opportunity to increase rents to market levels as leases in place are renewed. The portfolio is 93% leased with 65% of tenants rolling their leases within a five-year period. Chicago is exhibiting high absorption rates and rental increases especially in the downtown core and nearby areas. As is true of virtually all gateway North American cities, a  esurgence is occurring in the relationship between work and life-style, with the millennial generation in particular favouring work environments near where they live and socialize. Open office concepts fostering high levels of collaboration are creating opportunities to renovate and open up historical offices to a new generation of companies and tenants.


Multifamily Property Exits in Texas: The 360 Degree Fund extended its banner year of successful multifamily exits and recapitalizations with the sale of the Carroll at Green Trails Class “A” property from Carroll Fund I in Houston Texas for a total gain of 2.5X our invested capital. This sale closes our investment in Carroll Fund I which generated a 2.2X net equity multiple for the 360 Fund in a three-year period. The 360 Fund continues to maintain exposure to more than 30 multifamily properties managed and sourced by the Carroll Group through its ongoing investments in Carroll Funds II and III.


Another long-held partnership of the 360 Fund is its investment in 13th Floor’s Florida Value Funds I and II. 13th Floor is focussed on value-add redevelopment opportunities in South Florida including Miami, Naples and Key West. Peary Court is a 24- acre property with 157 rental townhomes in the heart of Key West that was purchased from the US Navy for $35 million on August 30, 2013. The most likely outcome for this project is to upgrade and convert the facility to a luxury condominium community. The second option is to continue operating the property as is, and to boost rents and operating income over time before selling the property. This program is going well with rents of $2,500 achieved up from $2,150 when the complex was purchased. 13th Floor is currently studying the condo conversion option and is developing a detailed budget capturing the improvements required to enable condo conversion, conducting market studies to determine potential pricing, and creating a schedule of improvements to individual units and common amenities which are expected to include a pool and landscaping. As of June 30th, the base case “as is” rental and sale is expected to generate a 22% IRR and 2.5X equity multiple, while the condo conversion option is projected to produce a 59% IRR and 3.3X multiple.



Canada Real Estate Outlook and Investments


KingSett Income Fund: Sheppard Centre Toronto, Ontario

Our core Canadian real estate investment continues to be with KingSett Capital of Toronto. The KingSett portfolio is comprised of more than 50 Class A and Class B office,  multifamily, retail and industrial properties across Canada. These properties include the Bayshore Shopping Centre in Ottawa, 130 Bloor Street West retail/condominium complexes in Toronto, and the Cherry Hill apartments in London, Ontario. KingSett management, led by Jon Love, are disciplined capital allocators and are adept at incremental improvements leading to above-inflation rental gains in their properties. Outside of this investment, we continue to believe that the risk/return for US real estate is superior to most of what we see in Canada especially in multifamily, distressed mortgages, and Class B office space in gateway cities.



Private Equity – MacNicol Emergence Fund:


The investment objective of the Emergence Fund is to generate capital gains and income by investing in a portfolio of fast-growing public companies and private equity funds. The Fund seeks opportunities in private equity where capital exit strategies are clearly defined, and are likely to occur within a 3-5 year time frame. The Emergence Fund invests in established private equity funds and directly in public companies with defensible franchises, high growth profiles and proven management. Investments will largely focus on profitable companies with high levels of proprietary technology addressing large target markets.


A good example of this strategy is our investment in Shopify Inc. of Ottawa. Shopify is one of the fastest growing e-commerce companies in the world and is well supported with shareholders including Georgian Partners of Toronto , Insight Capital of New York and OMERS pension fund of Toronto. Shopify’s core business handles all of the back-end administration for on-line and conventional retailers from web site creation and design, to shipping and billing. This service is extremely compelling with price points starting from as low as $50 per month. Shopify currently has more than 160,000 clients on its platform and has been growing that total by more than 80% per year. The size of the global on-line e-commerce market is enormous and growing by more than 20% per annum, meaning that Shopify has a very long “runway” of high growth ahead.


On May 21, 2015, Shopify raised an additional $100 million through a well-received Initial Public Offering (IPO) that saw its value rise by 50% on its first day of trading. The Emergence Fund accumulated its interest in Shopify as a private company through its investment in Georgian Partners Funds I and II. Since then, the company’s valuation has increased by almost 20X, and as a public investment represents both significant value and liquidity for investors in the Emergence Fund once our “lock-up” period ends in November of this year.


In addition to the Emergence Fund’s investments in Georgian Partners I and II the Fund is also invested in the Northleaf Secondary Private Equity Fund and the Northleaf Private Venture Catalyst Fund. Northleaf is one of the largest and most established private equity firms in Canada with clients that include the Canadian Pension Plan (CPP) and the Toronto Dominion Bank. The Emergence Fund is also invested in technology growth companies through an investment in a US-based fund (Multiplier Capital) that specializes in providing convertible debt loans to private companies. This strategy is highly lucrative with less risk than conventional private equity investing because of the senior position of its loans. Multiplier is currently paying a 10% annual distribution and its portfolio is performing extremely well across the board.


Hedge Funds – Absolute Return Fund


The investment objective of the Absolute Return Fund is to generate positive returns under most market and economic conditions, and to have little or no correlation to the US and Canadian stock markets. In order to achieve its objectives, the Absolute Return Fund invests in several value-added strategies managed by experienced and successful Canadian, US and U.K. hedge fund managers. Most of these investments are not available in the public market and are typically not accessible to individuals and smaller institutions because of high minimum investment thresholds, often in excess of five-million dollars. During the year, we continued to add to our investment in the Sankaty European Opportunities Fund which we expect to continue to generate a high-teens net return for its investors. Sankaty is one of the largest restructuring and secondary funds in Europe. It seeks to restructure and recapitalize companies and LBO funds (levered buyout funds) that have found themselves with too much debt post the 2009 economic downturn.


Closing Comments


We are very pleased with the progress of the private equity, real estate and hedge fund components of the Alternative Trust which continue to perform to our objectives while showing positive growth in both up and down stock markets. With respect to the private equity component of the Trust, we believe we are at an important inflection point for several of our investments which will in turn drive significant positive returns for the Trust in the quarters and years ahead. The Alternative Trust remains open to new investors and is available for purchase on a monthly basis.





MacNicol & Associates Asset Management Inc.