Investor Update - 4Q17

It is our pleasure to enclose a check representing your pro rata share of the $145,311.81 distribution from HJKS Partners, II, LLC. This amount represents revenue received in 4Q17 (a 23.2% return of capital), bringing our total returned since inception to $323,580.65 (a 69.25% return of capital called to date and 161.08% return on capital deployed to date).

We are pleased with the initial performance of the Fund. In 2017, we were obviously anchored by the HAMILTON Angelica Tour, which has returned 3.5X since March 2017, a very healthy MOIC and IRR. HAMILTON George III (London) recently opened to near unanimous raves, and we expect 2018 to provide a robust return for the Fund’s investment. The HAMILTON Philip (2nd National Tour) opens in February in Seattle, promising a third income stream for the Fund in 2018.

In addition to these obvious stalwarts, we are delighted our two smaller investments in plays are profitable as well. Our investments of £17,490 in LABOUR OF LOVE and £10,000 in OSLO, both on the West End, turned profits in 8 Weeks and 11 Weeks respectively. As we described in our previous update, we believe these healthy returns on the West End are due to the convergence of low capitalization costs (mostly from to the lack of hefty union labor fees) and increase in the Premium Pricing strategy that Broadway pioneered. For example, LABOUR OF LOVE, which cost <£600,000 started with £99 Premium Prices during previews (still hundreds lower than on Broadway) but, after opening, expanded the number of premium seats and boosted the top tier to £125, still relatively affordable premium prices, but igniting a rapid return of capitalization.

We are also excited to announce that in addition to our play under option, AN INTERVENTION, by Mike Bartlett, we’ve also recently optioned the stage rights (at a very low fee) to another property we’re keen to explore. Featured on 60 MINUTES, St. Benedict’s Academy is a formerly prestigious prep school in Newark, resurrected by a once rebellious student and now larger-than-life Benedictine Monk who turns the school around by letting the now largely minority student body call its own shots around the philosophy “Whatever helps my brother helps me. Whatever hurts my brother hurts me.”

You can view the 60 Minutes piece at: www.sbp.org/news/60minutes

As we’ve previously outlined, from both a financial and creative perspective, leading projects as General Partners, from an early stage, can reap tremendous rewards. Obviously, we are keenly aware of the inherent risk in “front money” investments and are accordingly cost-conscious. But not only can we creatively assemble the right team with the right property (an important and often misaligned step in the creative process), but in exchange for developing the property, if the show makes it on stage and turns a profit, the General Partners can often collect nearly 45% of every dollar of profit. That’s a larger “carry” than even in the financial industry.

In the real world, here’s a very basic waterfall:

Assumptions:

BROADWAY SHOW X has a Budget of $10,000,000
HJKS II invests $1,000,000 (10% of budget) into the production
BROADWAY SHOW X recoups its capital

$1,000,000 Gross Profit Distribution

$50,000 (5%) royalties deducted off the top for key creatives (director, designers, star)

$950,000 Net Profits split as follows:

$427,500 (50%) to the General Partners

$427,500 (50%) to the Investors

$42,750 Profit to HJKS II from 10% Investment

Therefore, if you are an investor as well as a General Partner, so long as the show isn’t mismanaged or fails to connect with audiences (which is always a possibility, of course) we can reap far greater rewards. It continues to be our strategy to remain actively (and selectively) investing/co-producing with other General Partners when fiscally and artistically prudent, while focusing on becoming General Partners ourselves with properties that we find both commercially and artistically promising. As an offshoot of this strategy, we also explore partnerships with those colleagues in the industry who are predisposed to risk development “front money,” so that in an ideal scenario, the Fund is not exposed to this initial fiscal risk.

This Spring will also mark the official expansion of our relationship with one of England’s most renowned and commercially successful director/producers, Michael Grandage, and his company MGC. We’ve spent several years, and many trips to London, planting the seeds of a successful cross-Atlantic partnership, and we’re delighted that it appears the fruits of these labors will finally pay off. After Michael finishes directing Broadway’s FROZEN, he will turn to two West End debuts, RED, by Oscar/Tony/Emmy winner John Logan, a seminal play which Michael previously directed on Broadway about Mark Rothko and starring Alfred Molina, and THE LIEUTENANT OF INISHMORE, by Martin McDonagh (whose film THREE BILLBOARDS OUTSIDE EBBING just won the Golden Globe, and whose work on stage, THE CRIPPLE OF INISHMAAN, we produced with Michael a few seasons ago), starring British star Aidan Turner. The combined total capitalization of both plays is a low £1.35m. Given the stellar returns of MGC’s previous UK productions, all of which we’ve supported since its infancy, there are more investors than allocations, but we’ve managed to carve out a sizable stake of £200,000.00 based on our shared bond and commitment to work together should these shows transfer to Broadway.

Our previous returns (in multiples of “X”) with MGC were:

1.5x in MGC Season 1 (2013 - 2014)
2x in PHOTOGRAPH 51 (2015 - 2016)
1.4x in THE DAZZLE (2016)
1.0x + in LABOUR OF LOVE (recouped November 2017, with profits to follow in 2018)

No matter our confidence level in the productions, and stellar fiscal track record with MGC, so as not to have any one production (other than HAMILTON) put undue weight on the Fund given the inherent risks of theater, we anticipate investing £100,000 from the Fund and offering Sidecar (or Co-Investment) opportunities in the other £100,000.00. As per our Operating Agreement, these Co-Investment opportunities will be, at first, exclusively offered to our Fund members based on a pro-rata basis. We will be contacting you in the coming weeks to share more specifics, but in the meantime, please don’t hesitate to get in touch with any immediate thoughts or questions.

And finally, for those interested in statistics, Broadway League just released its latest statistics. (You can download the report in its entirety on our website from the INVESTOR page.)

For the 2016-2017 season, Broadway shows yielded $1.45 billion in grosses. Total attendances reached 13.3 million - attendance per playing week was 8,400, a 4% increase from 2015-16 attendance per playing week of 8,081.