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  • Martin Kollmorgen


“Some people don’t like change, but you need to embrace change if the alternative is disaster.”

– Elon Musk

PERFORMANCE – Serenity Alternative Investments Fund I returned -2.5% in May net of fees and expenses and has returned -8.9% in 2022. The FTSE NAREIT All Equity REITs index returned -4.7% in May and has returned -13.0% for the year. CAPITAL PRESERVATION – The macro-economic landscape continues to dominate our decision-making process. This has resulted in continued alpha generation. SAFETY IN 5-CAPS? – Long ideas are hard to come by, but there is relative safety in blue-chip REITs trading at 5% implied cap rates.

Some things on Wall Street change rapidly. Others never do. While the loud, raucous trading floors of old are gone, there is still a vocal minority you can always find. The “it’s different this time” crowd never truly changes. There are always those willing to sell you a story that has no basis in long-term reality. Tech companies should trade at 40x sales, inflation is transitory, Bitcoin is going to $1,000,000. These stories end in disaster. Serenity offers a real change. We offer the opportunity to protect and grow capital by investing in the highest quality commercial real estate portfolios in the world. We invest alongside our clients and make active, concentrated bets. No over-diversified ETF. No promises of 30% indefinite returns from disruptive technology. No BS hidden fees or dubious IRR calculations. A high-quality REIT portfolio, a monthly account statement, and a promise to treat your capital the same way we treat ours. That’s it. That is a change we think investors can embrace. As 2022 has taught us, the alternative (tech and crypto narratives) can be disaster.


Serenity Alternative Investments Fund I returned -2.54% in May net of fees and expenses versus the FTSE NAREIT REIT index which returned -4.68%. Year to date, the fund has returned -8.9% net of fees versus the benchmark at -13.0%, the NASDAQ 100 at -22.3%, the S&P 500 at -12.8% and the Russell 2000 at -16.7%. On a trailing 3-year basis Serenity Alternatives Fund I has generated annualized returns of +20.0% net of fees and expenses. Over the same time period, the REIT benchmark has returned +8.6% on an annualized basis. The fund’s Sharpe ratio over the past 3 years sits at 1.25, versus 0.48 for the REIT benchmark (remember higher is better, more return per unit of risk). The largest positive contribution to the fund’s return in May was Switch, Inc (SWCH) at +12.1%. The company announced on May 11th that it is being acquired by Digital Bridge (DBRG) at $34.25/share. We sold our position after the stock rallied just shy of its eventual take-out price. Switch has been an excellent performer for the fund in 2022, returning +16.9% versus the RMZ at -24% as of this writing. Digital Bridge clearly agrees with our assessment that Switch offered a compelling growth profile at an attractive price. The worst performing position in the fund in May was Independence Realty Trust (IRT) at -14.1%. Independence was one of the funds best performing long positions through 2021 and remains one of our favorite names over the full cycle. Independence has a large re-development portfolio, exposure to growing markets with favorable demographics, and is likely to post top tier earnings growth over the next 3-5 years. While we continue to love the company, in the current environment, IRT is not our favorite stock. IRT has certain characteristics that simply perform poorly in a risk-off environment. Namely, it is a small cap, high beta REIT with exposure to tenants closer to the median US household income level. These exposures have led us to trim our IRT position meaningfully, while also shorting a highly correlated Apartment REIT peer in order to hedge small cap, high beta risk from the portfolio. This exercise in risk management is indicative of how our macro process informs portfolio construction in the fund. While the quant model and our fundamental research give IRT a thumbs up, right now the macro environment is more important. When credit spreads widen and growth slows, high beta REITs are not your friend. Our framework is intentionally designed to grant us the flexibility to identify and hedge these factors.


It is exactly this flexibility, in fact, that makes our fund unique within the REIT investing ecosystem. Most REIT managers focus exclusively on fundamentals, effectively isolating themselves as pure stock pickers. Very few REIT funds actively risk manage their portfolio by hedging (shorting or selling) individual REITs based on the macro economic environment. And fewer still employ multi-factor quantitative models that allow them to build hedging portfolios. They avoid active macro management for good reasons. First of all, macro economic analysis is the most difficult predictive space on Wall Street. The breadth of data available is immense, and it takes a huge amount of work to synthesize and analyze. For this reason, we partner with a firm that we believe is the premier macro provider on the street: Hedgeye Risk Management. Hedgeye employs an entire team of macro-analysts, and has a track record of making correct macro calls. Believe it or not, getting things right in macro is extremely rare on Wall Street. As we have become more and more cautious through 2022, Hedgeye has been out in front of the current risk-off environment. They went bearish on the market in January, and we followed soon after. They were also instrumental in helping us preserve capital for our clients in 2020. A COVID year in which our fund returned +17.9% versus the REIT benchmark at -5.1%. As the chart below illustrates, these periods of capital preservation via macro-awareness and risk management are hugely value-additive for our clients. When the market melted down in early 2020 the fund was properly positioned and saw a 20% jump in relative performance (versus the REIT benchmark) throughout that year. Similarly in 2022, we have pro-actively prepared our clients for an adverse market, raising cash and increasing our allocations to the short book. The orange outperformance line below continues to move up and to the right. This trend has continued in June, with REITs down -11.6% so far this the month, while Serenity Fund I has only fallen -3.76%. There is a term for this type of outperformance… ALPHA.

I stress our ability to integrate macro-analysis into our strategy because it is a differentiating feature of Serenity Alternatives Fund I. We intentionally designed the fund with capital preservation in mind, knowing that our clients would appreciate the ability to sleep at night while the rest of the investing market occasionally goes up in flames. This is one of those times. Serenity’s investors are down less than -10% through the end of May, with ARKK down -53.4%, Bitcoin down -40.0%, and the FANG stocks down -29%. AARK at $0.50 on the dollar, you have to post a +100% return just to get back to even. That is a tall order, particularly with a Federal Reserve that is firmly committed to raising interest rates. When I say I run a long/short REIT hedge fund I often get a sideways look. People’s expression often seems to conceal the question “why would anyone ever need that?”. My question at this point is different. How can any portfolio live without it?


From an outlook perspective, we remain bearish on the economy and continue to have an outsized cash balance and active short book. The Fed remains hawkish, economic indicators are rolling over rapidly, credit spreads are elevated, and the capital markets are destroying investor wealth at an ever increasing rate. Interestingly, very little economic damage has seeped into REIT fundamentals thus-far. At the recent REIT week conference hosted by industry trade group NAREIT, the tone of almost every company was extremely positive. Business travelers continue to return to urban hotels, renters continue to pay more for apartments, and warehouse users continue to lease space at an incredible clip. Juxtapose this against a REIT market that as of this writing is down -23.9%. What the market is saying is that the go-go days of incredible REIT fundamentals may be drawing to a close. For this reason the Serenity portfolio has taken on more and more defensive characteristics. In a market in which spreads are widening and volatility is high, historically, low beta, low leverage, blue chip REITs offer a modicum of protection (particularly when compared to high leverage, high beta peers). Two of our core allocations that fit this description are detailed below.


EQR is a blue-chip Apartment REIT specializing in coastal gateway, “A” quality, multi-family assets. A member of the Sam Zell real estate empire, EQR has a long and distinguished track record of generating cash flow growth and total returns for investors (+12.4% annual returns since 1993 IPO). EQR’s tenant base has an annual average income of $166,000, and the company sports a low levered balance sheet with a debt/asset-value ratio of about 20%

From a historical valuation perspective, EQR trades near the low end of it’s historical forward price/AFFO (cash flow) multiple, as can be seen in the chart to the right. It also trades at a 5% implied cap rate on 2022 NOI. For the sake of context, B quality Apartment portfolios were trading for 3.5% cap rates as recently as December of 2021. This would indicate that EQR trades at (at least) a -35% discount to a late 2021 NAV.

EQR posesses all the qualities that we look for in REITs during a risk-off environment. Low leverage, low beta, a customer that is somewhat insulated from econmic shocks, and an irreplaceable portfolio of some of the highest quality apartment assets in the country. While a recession would certainly impact EQR’s portfolio, the relative safety of a name like this makes it a high quality long during the current economic paradigm. CROWN CASTLE INTERNATIONAL (CCI) Crown Castle is one of the many unique real estate portfolios within REITs where investors have underallocated. CCI owns over 40,000 cell towers, about 115,000 small cells, and over 80 thousand route miles of fiber optic cable. Since 2014, CCI has grown it’s dividend at a 9% CAGR, has grown its cash flow per share at over 6.5% per year, and has returned +13.4% per year to investors. The company sports low leverage (18%), and remarkably consistent organic growth in the 5-7% range going back to the dawn of time (this is an exaggeration but not by much).

On a price to forward cash flow basis, CCI does not look quite as attractive as EQR, trading at 20.5x AFFO, north of the historical median of 18.1x. This median, however may be meaningless, as investors have in the past 5 years become much more familiar with the cell-tower companies and how robust their cash flow streams are. While no valuation is safe in the world of the hawkish Fed, 20x seems very reasonable for a company compounding growth consistently at 6% per year.

Like EQR, CCI trades at an implied cap rate a bit north of 5%. If we were to grow this cap rate at 6% for the next ten years, CCI’s NOI would be yielding 8.9% on the current stock price. After 20 years it would be yielding 16%. This powerful compounding and the companies ability to re-invest cash flow (saving it from having to issue equity often), make CCI a cash-flow juggernaught within the REIT space. Combined with the companies large market cap, low beta, and low leverage, and we have another blue-chip safety pick trading at a 5% cap rate. CHANGE OR DISASTER With the investing world currently upside-down and snake-oil salesman being exposed left and right, where do you turn for honest and transparent risk management? Do you allocate to the now-cheap tech company with negative EBITDA that is laying off workers in hopes of a rebound? Or are you investing in unique real estate companies with strong cash-flows that grow their NAV’s consistently over time? I’m no oracle, but I know where my money is. Change or disaster, Martin D Kollmorgen, CFA CEO and Chief Investment Officer Serenity Alternative Investments Office: (630) 730-5745

**All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments DISCLAIMER: This document is being furnished by Serenity Alternative Investment Management, LLC (“Manager”), the investment manager of the private investment fund, Serenity Alternative Investments Fund I, LP (the “Fund”), solely for use in connection with consideration of an investment in the Fund by prospective investors. The statements herein are based on information available on the date hereof and are intended only as a summary. The Manager has been in operation since 2016 and the Fund commenced operations on January 14th. The information provided by the Manager is available only to those investors qualifying to invest in the Fund. By accepting this document and/or attachments, you agree that you or the entity that you represent meet all investor qualifications in the jurisdiction(s) where you are subject to the statutory regulations related to the investment in the type of fund described in this document. This document may not be reproduced or distributed to anyone other than the identified recipient’s professional advisers without the prior written consent of the Manager. The recipient, by accepting delivery of this document agrees to return it and all related documents to the Manager if the recipient does not subscribe for an interest in the Fund. All information contained herein is confidential. This document is subject to revision at any time and the Manager is not obligated to inform you of any changes made. No statement herein supersedes any statement to the contrary in the Fund’s confidential offering documents. The information contained herein does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum and only in those jurisdictions where permitted by law. Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries and/or states of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. Before making an investment, prospective investors are advised to thoroughly and carefully review the offering memorandum with their financial, legal and tax advisers to determine whether an investment such as this is suitable for them.

There is no guarantee that the investment objectives of the Fund will be achieved. There is no secondary market for interests and none is expected to develop. You should not make an investment unless you have a long term holding objective and are prepared to lose all or a substantial portion of your investment. An investment in the Fund is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interests are restricted. As a result, investors may not have access to capital except according to the terms of withdrawal specified within the confidential offering memorandum and other related documents. The fees and expenses that will be charged by the Fund and/or its Manager may be higher than the fees and expenses of other investment alternatives and may offset profits. With respect to the present document and/or its attachments, the Manager makes no warranty or representation, whether express or implied, and assumes no legal liability for the accuracy, completeness or usefulness of any information disclosed. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such. Performance information and/or results, unless otherwise indicated, are un-audited and their appearance in this document reflects the estimated returns net of all expenses and fees. Investment return and the principal value of an investment will fluctuate and may be quite volatile. In addition to exposure to adverse market conditions, investments may also be exposed to changes in regulations, change in providers of capital and other service providers.

The Manager does not accept any responsibility or liability whatsoever caused by any action taken in reliance upon this document and/or its attachments. The private investment fund described herein has not been registered under the Investment Company Act of 1940, as amended, and the interests therein have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), or in any state or foreign securities laws. These interests will be offered and sold only to “Accredited Investors” as such term is defined under federal securities laws. The Manager assumes that by acceptance of this document and/or attachments that the recipient understands the risks involved – including the loss of some or all of any investment that the recipient or the entity that he/she represents. An investment in the Fund is not suitable for all investors. This material is for informational purposes only. Any opinions expressed herein represent current opinions only and while the information contained herein is from sources believed reliable there is no representation that it is accurate or complete and it should not be relied upon as such. The Manager accepts no liability for loss arising from the use of this material. Federal and state securities laws, however, impose liabilities under certain circumstances on persons who act in good faith and nothing herein shall in any way constitute a waiver or limitation of any rights that a client may have under federal or state securities laws.

The performance representations contained herein are not representations that such performance will continue in the future or that any investment scenario or performance will even be similar to such description. Any investment described herein is an example only and is not a representation that the same or even similar investment scenarios will arise in the future or that investments made will be profitable. No representation is being made that any investment will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between prior performance results and actual Fund results.

References to the past performance of other private investment funds or the Manager are for informational purposes only. Other investments may not be selected to represent an appropriate benchmark. The Fund’s strategy is not designed to mimic these investments and an individual may not be able to invest directly in each of the indices or funds shown. The Fund’s holdings may vary significantly from these referenced investments. The historical performance data listed is for informational purposes only and should not be construed as an indicator of future performance of the Fund or any other fund managed by the Manager. The performance listed herein is unaudited, net of all fees. YTD returns for all indices are calculated using closing prices as of Jan 14th, the first day of the funds operation. Data is subject to revision.

Certain information contained in this material constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund described herein may differ materially from those reflected or contemplated in such forward-looking statements.

Our investment program involves substantial risk, including the loss of principal, and no assurance can be given that our investment objectives will be achieved. Among other things, certain investment techniques as described herein can, in certain circumstances, maximize the adverse impact to which the Fund’s investment portfolio may be subject. The Fund may use varying degrees of leverage and the use of leverage can lead to large losses as well as large gains. Investment guidelines and objectives may vary depending on market conditions.

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