Alternative Asset Trust Quarterly Report: March 31, 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 120 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.


Chart 1 – Investment Structure MacNicol Alternative Trust



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 March 31, 2015 the Trust (E Class) has met its primary goals by generating positive calendar-year returns that have exceeded inflation, while delivering an annual return of 8.5% since inception.


First Quarter Highlights
During the first quarter of 2015 ending March 31, the Alternative Trust increased in value by 4.0%. For the past 12 months, the Trust returned 13.2% driven by strong performances in private equity, real estate and hedge funds. Looking forward, we are anticipating an acceleration of performance 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 First Quarter Highlights: For the first quarter of 2015, the 360 Degree Fund (D Class) gained 0.1% in USD terms and 6.9% in Canadian dollar terms reflecting the strong upward move in the US dollar during the quarter. For the past 12 months, the 360 Fund is ahead by 7.6% in USD terms and 17.7% 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
In October, 2014, the 360 Fund made additional investments into JCR Fund II and 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.
During the fourth quarter, the 360 Fund also invested 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 205 West Wacker Drive.




Chicago is exhibiting high absorption rates and rental increases especially in the downtown core. As is true of virtually all gateway North American cities, a resurgence 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 five Class “A” properties located in Houston and Austin, Texas. These properties were acquired via a sponsor-level investment in 2011 and 2012 with the Carroll Organization of Atlanta, Georgia and have generated net internal rates of return of 40%-50% to the Fund. The Carroll Organization is particularly adept at acquiring well located Class”A” and Class “B” properties while generating high rental and net operating income growth through aggressive asset and property management. The 360 Fund continues to maintain exposure to more than 20 multifamily properties located in Texas, Georgia, Florida and the Carolinas through its ongoing partnerships with the Carroll Organization.


13th Floor Fund II: Coconut Grove, Florida



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. A recent acquisition in Coconut Grove, an upscale neighbourhood south of Miami, is a great example of their value-add approach to investing. The acquired property (seen to the right) is a fullyleased office building purchased at a 5% capitalization rate. The business plan is to take advantage of its location which will benefit from a new park across the road and permanent unmatched views of the ocean, by eventually converting the office into a high-rise luxury condominium complex. The anticipated internal rate of return on this project is 23% with a 2.7X equity multiple. As 13th Floor works with the city to gain approval for its plans, the office building itself is generating strong rental income for our investors.


The Rockwood Capital Fund IX of New York is another 360 Fund investment with an emphasis on redevelopment and repositioning of assets to maximize value. Rockwood is one of the larger funds in which the 360 Fund is invested, and as such Rockwood has the financial capability to take on larger more complex projects across the US and in gateway cities. One of its most ambitious projects in Fund IX is the redevelopment of 55 Water Street in Brooklyn, New York. 55 Water Street is a 425,000 square foot historical building adjacent to the Brooklyn Bridge and squarely in the middle of Brooklyn’s technology triangle. The project will further capitalize on retailer’s West Elm’s 150,000 square foot anchor lease to drive office and retail leasing. Rockwood has also secured permits to add 70,000 square feet of glass roof additions to help capture premium office rents.


Rockwood IX Empire Stores 55 Water Street, Brooklyn, NY




In addition to the extensive upgrades planned for 55 Water Street, the city is investing $375 million into the “Brooklyn Bridge Park”, an 85-acre sustainable waterfront park stretching for 1.3 miles. This will further boost a neighbourhood that currently boasts an average household income of  $175,000 supported by 600 creative and technology firms within a ½ mile radius of the 55 Water Street complex.


Canada Real Estate Outlook and Investments
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 privately-held companies and private equity funds. The Fund seeks opportunities 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 private 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.


The Emergence Fund is invested in three primary end markets: Agriculture, Finance and Data Analytics. In agriculture, the Emergence Fund owns farmland in Brazil and Uruguay. We expect these investment to increase in value over time driven by growing demand for high-protein food in much of the emerging world. In the shorter-run, droughts throughout much of Brazil have reduced crop output and profits for our investment in Brazil. Uruguayan farm land, on the other hand, produced record crops and profits last year, and our investment there (Union Agriculture), is revisiting plans to list its stock on a public exchange.
In technology, the vast majority of our holdings are in late-stage, revenue generating data- analytics companies through our investment in the Georgian Partners Fund I and Georgian Partners Fund II of Toronto.




The 10 companies in the Georgian I portfolio grew revenues by more than 35% on average during 2014, and are well positioned to take advantage of global enterprise software and security trends including cloud storage management, electronic signature software, on-line retail, mobile computing and the growth of smart phone applications.


In 2015, we are looking forward to a possible initial public offering of shares of Shopify of Ottawa, which is the largest holding in the Georgian Partner’s Fund I. Shopify is one of the fastest growing e-commerce companies in the world and is well supported with shareholders including Georgian, Insight Capital of New York and OMERS pension fund of Toronto. From public information and news reports, it appears that Shopify is targeting a spring dual US and Canadian listing with RBC (Royal Bank of Canada) as the lead in Canada and Credit Suisse and Morgan Stanley as the lead investment bankers in the US.
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. A good comparison in terms of potential is the Chinese e-commerce and online retailing giant, Alibaba which recently went public with a valuation of 23X trailing revenues.
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.