650 MADISON AVENUE, 25

TH
FLOOR NEW YORK, NY 10022 (212) 584-2210


October 24, 2014

Dear Partner:

In the quarter ended September 30, 2014, the fund recorded a net loss of 1.1%. At
quarter end, the funds equity exposure was 91.9% long and 38.2% short for a net equity
exposure of 53.7%. In addition, the fund was 4.2% long and 0.2% short fixed income
securities for a net fixed income exposure of 4.0%.
1
The top five positions constituted
18.9% of equity capital and the top ten positions constituted 34.2% of equity capital.

Review of the Quarter

The fund declined 1.1% in the quarter. Our short performance was significantly better
than our long performance, but the funds overall net long exposure resulted in a small
loss for the quarter. Long equity positions generated a -4% return on capital, hedged long
equity positions generated a -3% return on capital, short equity positions generated a +7%
return on capital and fixed income positions were approximately flat.

The funds largest winner in the quarter was a short position in Carbo Ceramics (45bps).
In our third quarter 2013 letter, I shared our view that Carbos business faced structural
pressures as customers were shifting away from Carbos ceramic proppant in favor of
lower cost sand in hydraulic fracturing operations (a fact that the market chose to
blissfully ignore as the stock traded around 30x earnings). During the quarter, the
challenges facing the company grew evident as one of its largest customers announced it
would discontinue buying ceramic proppant altogether. Several weeks later, the
company issued an earnings warning, resulting in a collapse in Carbos share price. The
stock declined further post quarter end as oil prices fell sharply and we decided to close
out our short position at a nice gain.

The fund had one loser over 50bps in the quarter, our long position in Select Income
REIT (64bps), which I also discussed in our third quarter 2013 letter. This has been one
of the funds more irritating long positions in recent memory as our losses during the
quarter were solely due to the bad faith of the management team and the board. While
we recognized a dubious management team with an external management structure
would be an overhang for the shares, we believed the stocks dramatic undervaluation,
high dividend yield and publicly-announced steps to improve corporate governance
would lead to significant share price appreciation. Coming into the year, the fund had
generated a solid gain on this investment, and we thought we might see continued strong
returns with the stock trading at just 10x funds from operations (nearly 40% below peers
despite the company having attractive cash flow growth and an under-levered balance
sheet). In a low-interest rate environment, this stock should have been a home run. But,
unfortunately, a disingenuous management team and board were too busy serving their
own interests rather than working on behalf of the shareholders. During the past several

1
Excludes a structured long/short volatility ETF position.


2
months, the company issued equity, made changes to further entrench the management
and then to top it off, announced a significant acquisition partially financed with their
dramatically undervalued stock. Today, the stock trades at just 8.5x funds from
operations (nearly 50% below its peers) and pays an 8% dividend, which should increase
meaningfully in the years ahead. You would have to search far and wide to find a non-
mortgage REIT yielding even close to 8% these days (the fund in fact owns the only other
publicly-traded REIT above a $1 billion market capitalization with such a high yield,
American Realty Capital Properties). We continue to hold our position as we see the
potential for significant upside from current levels if even half of the extraordinary
valuation discount is retraced, we could see returns of 50% in the stock, inclusive of the
dividend.

Thoughts on the Market Environment

In recent weeks, investor anxiety reached levels that we have not seen for quite a while,
causing many individual stocks to sell off rather swiftly in the absence of any clear,
fundamental changes. We believe a series of idiosyncratic events may be to blame for
the sudden risk aversion such as large declines in the common and preferred shares of
Fannie Mae and Freddie Mac (a popular long position for many funds) stemming from a
negative court ruling, the termination of the AbbVie / Shire merger (an enormous risk
arbitrage position on Wall Street), the brutal sell-off in energy stocks due to the steep
decline in the price of oil and the well-publicized fears of an outbreak of the Ebola virus
in the U.S. With many investment funds struggling in this environment, we suspect
several market participants may have dramatically curtailed their appetite for risk even as
many stocks grew more attractive.

While we recognize overall market valuations are not yet unusually attractive and some
recent data points indicate slowing global growth, we have seen several interesting
investment opportunities emerge as a result of increased market volatility. Consequently,
the fund has been more active in the past three weeks than at any time since the fall of
2011. We have been increasing our long book (existing and new positions), which
generates an average free cash flow yield of nearly 10% (which is particularly striking in
the context of a 2.2% ten-year U.S. Treasury yield). At the same time, while we have
recently had favorable results in our short positions, we continue to be enthusiastic about
the opportunity set with our top shorts on average generating under a 2% free cash flow
yield, and therefore, we have largely maintained our level of short exposure (although
there has been some rotation between individual positions).

Some New Ideas

As I mentioned above, we have been particularly busy lately, and I would like to share
our views on our long positions in Washington Prime Group, Citizens Financial Group
and Lukoil and our short position in InvenSense.






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Washington Prime Group (Long)

During the quarter, the fund initiated a long position in Washington Prime Group
(WPG), a recent spin-off from Simon Property Group, the largest publicly-traded REIT
in North America. WPG owns a diversified portfolio of shopping centers, consisting of
both enclosed malls and strip centers. Following the spin-off, selling pressure from
Simon Property shareholders combined with a dearth of financial information and a lack
of any meaningful analyst coverage made WPG a classically mispriced spin-off stock. In
September, less than four months after emerging as an independent public company,
WPG announced the acquisition of Glimcher Realty Trust, a similarly-sized mall REIT.
This transformative acquisition added further complexity to an already misunderstood
situation, resulting in the stock falling about 20% below initial trading levels. We believe
that WPG is one of the cheapest stocks in retail real estate despite a high quality asset
portfolio, and we think the shares offer 50% or more upside to a valuation level that is
more in line with peers.

Last December, Simon Property, known for its larger mall and premium outlet portfolio,
announced plans to spin off its strip center and smaller enclosed malls portfolio. WPGs
initial portfolio of 98 properties represented nearly one-third of Simon Propertys total
portfolio by number but just a small fraction of its total operating income. For every
dollar of Simon stock owned, an investor received just a nickel of WPG stock. Given the
small size of the spin-off and Simon Propertys heavy weighting in real estate indices and
ETFs, we believe WPG shares experienced significant technical selling pressure.

WPG was spun off with an underlevered balance sheet and without a corporate
infrastructure. The accretive acquisition of Glimcher quickly levers the balance sheet to a
more appropriate level and eliminates the need to build out a new corporate overhead.
Additionally, the acquisition offers diversification into a faster-growing, high quality mall
portfolio and provides additional future development opportunities. The combined entity
will have significant scale, and with a market capitalization greater than $3.5 billion, it
will be one of the 15 largest retail REITs in the United States.

Pro forma for the Glimcher acquisition, WPG currently trades at a 6% dividend yield,
less than 9x funds from operations and less than 11x adjusted funds from operations
(AFFO) of $1.60 per share. Regional mall peers trade at dividend yields of 4% and
15x AFFO and strip center peers trade at dividend yields below 4% and 18x AFFO. As
investors become familiar with the company over the coming quarters, we think WPG
shares can ultimately trade closer to 16x AFFO, equating to a price of $25 per share and a
total value in one year of $26 per share (including dividends), more than 50% above
current levels.

Citizens Financial Group (Long)

Late in the third quarter, we initiated a position in Citizens Financial Group at the time of
its IPO. Citizens is the 13
th
largest bank holding company in the U.S. with a strong
deposit franchise in the Northeast, particularly in New England. Since 1988, Citizens has
been a wholly-owned subsidiary of the Royal Bank of Scotland (RBS). Following its


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bailout during the financial crisis, RBS fell under the control of the U.K. government. As
part of its on-going restructuring, RBS agreed to divest certain assets and businesses,
including Citizens. RBS sold 25% of its stake in Citizens in the IPO and is required to
divest its remaining stake by the end of 2016. We believe the combination of a forced
seller and an undermanaged business has created a compelling investment opportunity.
The IPO priced at $21.50 per share, equating to approximately 0.95x tangible book value
of slightly under $23 per share, which is cheap on both an absolute basis and relative to
its regional bank peers that generally trade at or above 1.5x tangible book value.

Citizens has been an undermanaged business with subpar profitability that has
considerable opportunity to improve its performance in the coming years. Coming out of
the global financial crisis, Citizens shrank its balance sheet and reduced credit risk at the
direction of RBS. As a result, the companys balance sheet is now heavily
overcapitalized with a 12.6% Basel III Tier 1 common ratio (over 200 bps higher than its
peers), and the company is significantly less profitable than other large regional banks
(5% to 6% returns on tangible equity versus peers at roughly 12%). Managements stated
goal is to reach over 10% returns on tangible equity by the end of 2016. We believe this
target is reasonable and do not foresee any structural barriers to material ROE
improvement at Citizens. About one-third of the companys ROE improvement will be
driven by loan and fee growth and net interest margin expansion (NIMs are currently
25bps to 30bps below peers). Another third of the ROE improvement will come from
continued cost cuts and capital returns (achieved through buybacks and a 30% dividend
payout ratio). Lastly, Citizens ranks among the most interest rate sensitive regional
banks which should allow the company to benefit meaningfully from a normalization of
interest rates over time.

We find the risk-reward of an investment in Citizens to be highly asymmetric. We
believe that it is unlikely that Citizens will trade much lower than 85% of forward
tangible book, which would be less than 10% downside from the current stock price.
However, if the company generates a 10% return on tangible equity as we expect, we can
see the stock trading at 12x earnings or higher, representing at least 50% upside, inclusive
of dividends. If Citizens is able to fully close the gap in ROE and valuation with its peers
over time, the upside in the share price can be substantially greater.

Lukoil (Long)

We have historically found some of our best investments in situations where we see other
investors on the run. Admittedly, few investments sound less appealing right now than
Lukoil, a company operating in the markets worst performing industry (energy) and
located in the markets most detested country (Russia). Although many investors have
not even heard of Lukoil, the company produces 2% of the worlds oil and has more oil
reserves than each of Exxon Mobil, BP and Shell. Reflecting concerns around the
Russia-Ukraine conflict and a general weakness in energy-related companies, the shares
trade at just 2.3x current EBITDA, 3.1x current earnings and 45% of tangible book value
(making Lukoil the cheapest stock we have ever owned). In the coming years, we
believe Lukoil will see growing EBITDA and declining capital expenditures, and the


5
companys already high annual dividend is poised to increase for the foreseeable future,
which should drive solid returns in the companys shares.

Lukoil has substantial, attractive oil and gas reserves inside and outside of Russia. The
company is near the end of a multi-year capital expenditure cycle that will both boost
production levels and increase the profitability of the companys vast oil refining
business. Lukoil has no government ownership and the company is not directly affected
by sanctions relating to the Ukranian conflict. Furthermore, because the companys
profits are largely derived from a global commodity, Russian economic growth does not
play a major role in the companys financial performance. While the recent decline in oil
prices will pressure the companys revenues, the depreciation of the Russian ruble has
offset most of this impact as the majority of the companys costs are paid in rubles
(leading to a material decline in the companys dollar-denominated costs).

The stock currently pays an attractive 7% annual dividend yield, and the company has
committed to increase the dividend by at least 15% annually until 2021 (a level the
company has consistently exceeded). Achievement of this plan would result in a near
tripling of the dividend over the next seven years, and we believe Lukoil will have ample
resources to honor its commitment due to the companys low debt levels, substantial
earnings levels and increasing free cash flow (we project capital expenditures to decline
by around 25% in the coming years leading to a tripling of free cash flow).

Lukoil management has been actively buying shares in the company on a scale we have
never before seen. Despite already owning a third of the outstanding shares (a stake
worth around $13 billion) management has been aggressively adding to their personal
holdings. Thus far in 2014, members of Lukoils Management Board have purchased
almost $300 million of stock after purchasing over $700 million of stock in 2013. In
May of this year, CEO Vagit Alekperov publicly stated that he will use the $600 million
of dividends he expects to receive this year to buy even more Lukoil shares.

We can imagine why Lukoil management is so bullish on their stock. Even if the stock
continued to trade at a healthy 7% dividend yield, an investor would earn 23% annual
returns for the next seven years if the company delivers on its dividend growth
commitment. If the stock traded at a more reasonable 5% yield, the annual returns jump
to 28% annually. While we recognize investing in a volatile industry in a volatile
geography carries its own unique risks and uncertainties, we think that the upside
optionality in the stock at just 3.1x earnings is enormous and unlike a lot of other stocks
we see, its unlikely investors are going to get too hurt by multiple compression from
these levels.

InvenSense (Short)

Over the years, we have seen a recurring theme of technology component companies
awarded sky-high valuations when they are an early mover in a fast growing industry,
only to see their share prices later collapse due to increased competition and customer
concentration issues. In the past, I have discussed in detail companies like STEC
(mentioned in our second quarter 2009 letter), Motricity (fourth quarter 2010), OCZ


6
Technology (second quarter 2011) and Fusion-io (fourth quarter 2012), all of which
ultimately saw their financial performance and share prices decimated. Additionally, we
experienced similar outcomes with our short position in Mellanox in 2012 and our short
position in GT Advanced Technologies in recent weeks (more on this in a bit).

We are short InvenSense, which produces motion sensors such as gyroscopes and
accelerometers that are predominantly used in mobile devices. InvenSense shares have
nearly tripled since its IPO in late 2011 with bullish investors initially excited about a
first-mover advantage in the growing motion sensor market for mobile products and more
recently, enamored with the prospect of winning business with Apple, as the companys
technology is used in the iPhone 6. Historically, InvenSenses unique, patented
fabrication process provided it with an advantage versus its competitors in terms of cost,
footprint and power consumption. This advantage manifested itself in 56% gross
margins and EBIT margins north of 30% in the fiscal year ended March 2012. However,
we believe that over the past few years, competitors such as STMicroelectronics and
Bosch have effectively caught up to InvenSense, as the industry is approaching the finite
physical limits to advancements in the technology.

While revenue growth over the past couple of years has been robust, this competition has
dramatically pressured pricing and has led to significant declines in margins, with gross
margins falling to less than 50% and EBIT declining to about breakeven in the most
recent quarter (both of which exclude non-recurring items but include an ever-increasing
amount of stock compensation, a significant expense that analysts and investors appear to
be overlooking). To put this in perspective, revenue is projected to grow by 150% in
March 2015 (the companys fiscal year end) compared to March 2012, yet the companys
GAAP operating profit (adjusted for non-recurring items) is expected to be roughly flat.
We believe the presence of these formidable competitors, the potential impact of newer
entrants (such as Maxim Integrated Products) and an extremely powerful, concentrated
customer base (Samsung and Apple) will continue to pressure future margins and profit.

At a recent price of about $21 per share, InvenSense has a market capitalization and
enterprise value of about $2 billion, quite a healthy level for a company with declining
margins and just $67 million of tangible assets excluding cash and investments (which
were mainly received in its 2011 IPO). Even when excluding the substantial stock-based
compensation expense, InvenSense shares trade at 24x non-GAAP EBIT and 27x non-
GAAP earnings. Over the last couple of years, stock-based compensation expense has
increased from about $9 million in fiscal year 2013 to an estimated level of $32 million
for fiscal year 2015, remarkably over 60% of the expected GAAP operating profit. We
believe this reallocation of expense and focus on non-GAAP results has successfully
diverted many investors focus away from the significant deterioration in economic
profits. Over time, as the excitement of winning Apple becomes a distant memory and
investors realize they own a company competing in a maturing, commoditizing market,
we believe InvenSenses stock will more accurately reflect its economic reality. We
believe that true economic earnings power for InvenSense is roughly $0.50 per share, and
even applying a generous multiple of 20x would result in a stock price of $10 per share,
more than 50% below current levels.



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Finally, over the past year, enthusiasm for InvenSenses stock has been centered on the
potential for the company to win business in the recently launched Apple iPhone 6
(Apple had not previously been a customer). We often find that the anticipation of
something grand often proves to be more exciting than the economic reality, and we
believe that this is likely the case with InvenSenses now-confirmed placement in the
iPhone. While we do not doubt that this business will help the company grow, selling
commodity components to companies like Apple is a tough way to make money.
Investors would be well-served to study the experience of GT Advanced Technologies, a
company I referenced above that the fund has been short in recent months. GTs stock
soared on investor excitement that the company was awarded a contract to supply
sapphire to Apple. The company was a $3 billion market capitalization darling one
month, and literally gone the next, as the company crumbled under onerous contract
terms imposed by Apple, leading to a Chapter 11 filing. Be careful what you wish for.

Operational Update

Earlier this year, the funds auditor and tax advisor, Rothstein Kass, was acquired by
KPMG. This transaction presented us with an opportunity to assess our current
accounting needs in the context of the funds growth since our launch over seven years
ago. As a result of this review process, Lakewood selected Ernst & Young as auditor and
tax advisor beginning with the 2014 calendar year. Our goal at Lakewood has always
been to provide our investors with accurate, timely and informative financial and tax
reporting. We believe Ernst & Youngs expertise in the hedge fund industry and the
quality of their people will help us to continue to deliver on this goal. We want to thank
Rothstein Kass for their many years of quality service.

Conclusion

Periods of volatility have historically presented us with our best opportunities. As we
move through a period of elevated investor anxiety, we are working hard to take
advantage of the many opportunities we see while at the same time carefully managing
risk within the fund.

We greatly appreciate your confidence and support. Please reach out should you have
any questions or thoughts you would like to share.

Sincerely,



Anthony T. Bozza

_______________________________________________________________________
Returns disclosed are for Lakewood Capital Partners, LP (Lakewood Capital). Lakewood Capital Offshore Fund,
Ltd (Lakewood Offshore) invests directly into Lakewood Capital and therefore, the returns of Lakewood Offshore
are similar to those of Lakewood Capital. For purposes of calculating long, short and net exposure, option exposure is
calculated on a delta basis.


8

Performance results are presented on a net-of-fees basis and reflect the deduction of among other things: management
fees, brokerage commissions, administrative expenses and accrued incentive fees, if any. Net performance includes the
reinvestment of all dividends, interest and capital gains. Depending on the timing of a specific investment and
eligibility with respect to participation in "new issue" investments, net performance for an individual investor may vary
from the net performance as stated herein. Performance data and other information contained herein are estimated and
unaudited.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve
risk including the loss of principal. This information is confidential and may not be distributed without the express
written consent of Lakewood Capital Management, LP and 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 private offering memorandum and subscription documents which contain more
detailed descriptions of all the material terms of such an investment, including discussions of certain specific risk
factors and other matters relevant to prospective investors.