Investor Update - 2Q17

We are pleased to begin our quarterly distributions for the Fund with $171,494.69 in revenue and to enclose a check representing your pro-rata share. This amount represents revenue received in 2Q17, and a 27.4% return to investors. (As a reminder, we do not recycle funds or take a management fee.)

As you will see from your Investor Statement, the HAMILTON juggernaut continues. In early June, the HAMILTON “Angelica” National Tour recouped 100% of its $8.5m capitalization after only 10 weeks of performances, and by the end of the month, the tour had returned an impressive 50% profit to its investors, thus providing 100% of the revenue for the Fund this quarter. To forewarn, such large profit checks will not always be consistent, but it nevertheless testifies to the robust health of the production, now in San Francisco, and soon on its way to Los Angeles.

Just this past week, HJKS II also invested $67,252.82 towards the HAMILTON UK Limited Liability Company. This London production, which starts in November at the Victoria Palace Theatre, is being co-presented by one of the UK’s most successful theater producers, Sir Cameron MacKintosh (LES MISERABLES) who also owns the theater and therefore lends tremendous expertise. Typically, the flow of profits out of a UK production are not as sizable as on Broadway. Culturally, West End premium prices are lower, and the production must deal with a fluctuating exchange rate and stringent UK tax laws, but we nevertheless feel very confident in the success of the show in London.

Also in London will be our next investment, LABOUR OF LOVE, starring Martin Freeman (Watson in SHERLOCK) and BAFTA winner Sarah Lancashire opening September 16th at the Noel Coward Theatre for a limited 11-week run. This investment of $23,363.61 continues our longstanding work with Michael Grandage, one of the preeminent directors and producers of our time. Capitalized at only £600,000, the production has already accrued advance ticket sales of > £1m at the box office. When you factor in the £90,000/week running costs, we should recoup our investment once total gross sales pass the ~£1,700,000 mark. To put these figures into perspective, this same production on Broadway would likely cost $3.5m-4m to capitalize and $400,000/week to run. While the rewards are likely not as sizable as on Broadway, the risks are far less as well. Michael Grandage, and his company MGC, have created an unparalleled commercial and artistic track record on the West End as well as in several Broadway transfers (many of which we have been a part). We hope that if you are in London in the Fall, you will contact us to arrange tickets to see the play.

Overall, our startup costs have remained on track, or just under, our predictions, and our development of the play which we are Lead Producing is also moving forward at a healthy, albeit frustratingly industry-standard slow pace, after a successful reading at the end of May with two star actors and our Tony Award-winning director Michael Mayer. For this development stage, we have also arranged from a renowned producer with whom we’ve long worked $50,000 in “front money” so that this risky initial money towards the play’s casting, rights payment, and director’s advance, will not come from the coffers of the Fund.

The Summer is typically a quiet time for the industry as the post-Tony lull results in many shows of the 2016-2017 closing and workshops for 2017-2018 gearing up for the Fall. We are tracking as many new shows as possible and are leveraging our relationships in order to provide the best access for the Fund. 2016-2017 was a record-breaking season for Broadway with 45 productions grossing over $1.4bn at the box office, a 5.5 percent increase year over year. However, attendance was slightly down from last season (13.27m vs. 13.32m in 2015-2016). Overall attendance from four years ago is up 14.7 percent. These statistics point to the effect of dynamic ticket pricing boosting the overall grosses for shows and sophisticated analytics helping producers and theater owners adjust ticket prices. HAMILTON was not only the top-grossing show but also the highest ticket price at $849 for orchestra seats. While this is a staggering price to pay for a ticket, it must be firmly noted that ticket prices must not only rise to meet demand and return money to a show’s investors and compensate its artists, but also to recapture revenue that was being lost to scalpers. The average price-per-ticket on Broadway this season was also a record: $109. In other words, Broadway has never seemed so financially healthy. All of these promising and staggering statistics also point to an underlying danger of which we are well aware: Broadway continues to be an increasingly expensive feast or famine business. The hits keep getting bigger, but so do the costs of the flops. And, from an investing standpoint, the challenge remains the same: there is no “sure thing,” but the projects which seem the likeliest to succeed are funded by longstanding and loyal investors, so we must sometimes be willing to take certain calculated risks in order to reap larger rewards. Additionally, non-musical plays now struggle to grab attention from the mega-hits and studio-driven musicals with seemingly unlimited advertising dollars (typically a show’s weekly advertising budget does not exceed $100,000 per week but a studio can spend twice that and absorb the costs). Whereas 5 years ago, a play with Cate Blanchett, Chris Cooper, or Kevin Kline, would have helped assure at least full recoupment, now these plays are risky investments.

However, despite our conservatism, we are overall very optimistic. From an artistic standpoint, the season saw audiences embrace seemingly difficult subject matters (e.g. a musical about a teen suicide, a play about a secret Israeli-Palestinian backchannel negotiations) because they were artistically deep, emotional, works of art. And commercially, as the Disney Theatrical President Thomas Schumacher astutely pointed out, “if you look at other forms of entertainment media, we’re doing better than probably anyone else in the realm.” So, what to do about the rising ticket prices and the increasing pressure on non-musical plays? Hopefully the 2017-2018 will help shed an answer, and most importantly, hopefully we will be on the right side of that equation.

As always, please don’t hesitate to contact us should you have any questions. We are conscious of your limited time, but are always happy to setup a quarterly phone call. We thank you for your confidence and joining us on this journey.

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