6/8/2015

ValueInvestorsClub/DolphinCapital(DCI)

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Dolphin Capital DCI

December 09, 2013 by cfavenger (/member/cfavenger/37574)
2013 2014
Price:
39.60 EPS
NA
NA
Shares Out. (in M):
642 P/E
NA
NA
Market Cap (in M):
416 P/FCF
NA
NA
Net Debt (in M):
178 EBIT
0
0
TEV:
594 TEV/EBIT 0.0x 0.0x

Description

Dolphin Capital (DCI) is an interesting deep value opportunity. DCI is an AIM traded real
estate vehicle managed externally by Dolphin Capital Partners. The company is a
developer of high end residential resorts. Approximately 43% of their portfolio is in Greece,
32.4% in Cyprus, 7.4% in Croatia/Turkey, and 17% in the Americas. DCI partners with highend prestige partners including (i.e., Aman Resorts, Ritz Carlton, Oberoi, Jumeriah, etc)
to create luxury residential resort locations.
DCI is externally managed by Dolphin Capital Partners which is entitled to a 2%
management fee on equity and a 20% incentive fee with certain hurdle rate provisos. The
managing partners of Dolphin Capital Partners came out of Soros Real Estate Partners.
DCI stock trades at 60% of stated NAV and around 30% of a DCF on the companys
projected development pipeline. They are conservatively capitalized with the balance
sheet strength to withstand market disruptions and the cash flow to support development
capex without requiring further equity raises. Finally, investors can take some comfort that
the concentrated active involvement of Third Point should keep managements feet to the
fire of shareholder value creation.
The Balance Sheet:
A key part of the Dolphin story is their solid capital structure.
Dolphin has total borrowings of EUR 173MM Of this debt, EUR 50MM and USD 9.2MM are
convertible bonds issued at the company level. The parent company has also guaranteed
an additional USD 50MM of property level obligations.
Against this debt, Dolphin holds real estate assets with a stated NAV of EUR 600MM, EUR
202MM of equity investments (including a 49.8% stake in a Cypriot builder and a 25%
stake in the Nikki Beach project), and EUR 43MM in cash. Net of EUR 32MM in minority
interests this is over EUR 800MM in asset value. A current debt to asset ratio of 21% with
the bulk of that debt segregated at the non-recourse project level is a conservative
capitalization.

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Dolphin has significant ability to pace its incremental project capex to the level of market
demand for properties. The protective nature of this is very important. If market
conditions significantly deteriorate, DCI shouldn't find itself overlevered with half
completed mega-projects. Rather, they will be able to slow the incremental buildout of
their residential properties and wait out a storm. If property markets show weakness or
Greece/Cyprus undergo another period of turmoil then cash flows may be delayed but the
company can wait out the storm.
The company believes it has the ability to fund the full development of its existing property
portfolio from operating cash flows. Today's considerable discount to NAV shouldn't be
whittled away by diluted equity raises.
Discount to NAV:
DCI has a stated NAV of EUR 522MM or GBp 68/share. Property level asset values are
provided quarterly by American Appraisal and Colliers, and audited by KPMG. It is worth
noting that there are several elements which could render this NAV estimate conservative.
First, property sales at DCI to date have exceeded stated NAV estimates. Second, NAV
appraisals largely ignore the value generated by progress along the permitting process
from raw unpermitted land to a developable project. NAVs have already been marked
down considerably over the past four years to reflect economic conditions in Greece and
Cyprus.
DCI provides an estimated cash-generation estimate for their portfolio.The company
believes that its four advanced projects will generate EUR 390MM of net cash returns over
the next six years and an additional EUR 831MM in the following six years (2019-2025).
Other major projects are expected to generate EUR 1.3B in the 2013-2025 time period.
Residual land interests with an indefinite time horizon for development are estimated to
hold a EUR 1.16B net cash generation potential. Finally, DCI attributes a 276MM value to
their Aristo stake based on a normalized EUR 15MM dividend beginning 2015 with an 8x
annual dividend terminal value. Altogether this leads to a total of EUR 3.958 portfolio cash
potential.
While such long term estimates must be taken with a grain of salt, they do indicate the
potential for upside optionality in DCI. Modeling these cash flows with what I believe are a
conservative estimates of timing, a 15% discount rate, and manager fees, I get DCF per
share in the 100-150 GBp range. This assumes no inflation on the underlying real estate
assets during the next twelve years or attractive reinvestment potential. The point here is
not to place a precise DCF value on such a long-term uncertain cash stream, but rather to
illustrate the significant optionality which exists in DCI versus a stock price around 40 GBp.
Quality Co-Investors:
While it can be dangerous to rely upon the intellect and reputations of other holders, it can
be helpful to benefit from the shareholder oversight provided by large concentrated peers.
Major notable investors of note in DCI include Third Point LLC, Fortress, Fir Tree, and SC
Fundamental. Management is also a 13.5% owner of DCI via Dolphin Capital Partners.
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Third Point owns 20.2% of the shares in DCI which it purchased via a capital raise in
October 2012. It also owns a significant amount of the companys convertible debt which
it backstopped alongside Monarch Capital. Third Point appointed David Heller to the
board of Dolphin. Heller, a former Goldman Sachs management committee member and
co-head of Global Securities, is a highly respected individual. Third Points extensive
involvement alongside several other concentrated holders not known for a reticence to
assert themselves provides some comfort that this entity will be managed to maximize
shareholder value.
Investment Summary:
Dolphin is a compelling value investment with several attractive characteristics. The stock
trades at an attractive discount to appraised NAV with upside optionality in the 3X range if
managements view of long-term cash flows are in the range of reality. The company has
a conservative capitalization and attractive cash flow characteristics, which limit the risk
that the path to ultimate value will be cut short by an intermediate period of adverse
conditions. Finally, investors can benefit from the oversight provided by active
concentrated shareholders.
There are of course risks. I certainly cannot assert say Greece and Cyprus are out of the
woods re: macro risks. That said, DCI performed far better than one might have thought
through the Cyrpus banking crisis earlier this year. DCI benefits from programs in Greece
and Cyprus which grant EU citizenship to anyone purchasing property above EUR 250300K. A healthy global market exists in regions such as China for wealthy individuals
looking to diversify their citizenship exposure. Macro volatility can also be a source of
opportunity as DCI is well positioned as a buyer of distressed real estate assets.
DCI is a long-term asset value story and those who need financial models with multiple
decimal points of quarterly precision can move onwards. This a a long term development
pipeline and a lot can happen over 12-15 years. While the company has a sufficiently
conservative structure to wait out significant periods of turmoil, the delay of cash flows
obviously would impact the stock's present fair value. If there was a clean and obvious
catalyst then it is unlikely the stock would trade at thee levels.
However, with its steep discount to NAV, powerful upside optionality, and the ability to
weather a potentially stormy path to realization, investors at this price seem very well
compensated for these risks.

I do not hold a position of employment, directorship, or consultancy with the issuer.

I and/or others I advise hold a material investment in the issuer's securities.
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Catalyst
This is a long term asset value play. With a steep discount to asset value and active,
concentrated investors, the potential certainly exists for some kind of asset/company sale
accelerating a realization of value. But, investors here should place this in their patient,
long term bucket and treat any accelerating catalysts as a ninth night of Hannukah.

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Messages
Subject
Development costs
Entry
12/10/2013 11:41 AM
Member
Toby24
Thanks for the idea. Curious if you could elaborate a bit on the following items...
First, the expectation they will generate EUR 390 over the next six years from these four advanced projects and
1.3B from other projects during 2013 to 2025...are these cash flows net of anticipated development costs? If
not, what are the expected development costs and what is the expected net cash inflow by year? Maybe this
level of disclosure isn't provided but to your point, lumpiness in these cash flows would significantly change the
value you get in a DCF.

Second, any insight as to the appetite for large resort properties right now compared to say three years ago, five
years ago, ten years ago? Since they plan on eventually selling these at one stage of development or another,
curiuos who the players are in terms of buyers and what the trends have been.

Thanks a lot.
Subject
RE: Development costs
Entry
12/10/2013 01:02 PM
Member
cfavenger
Yes those are net cash flows which incorporate development costs. You can look at page 13 of this
report:http://www.dolphinci.com/downloads/files/company_reports/2013/interim_2013.pdf

As they state, the cash estimates include "All cost assumptions cover future development, marketing, sales,
branding and agency costs and do not include already incurred expenses for land acquisition and
development." The company provided estimates do not include corporate tax or management/incentive fees
which you need to model separately. They also dont include any inflation assumptions to adjust your discount
rate accordingly.

I don't have a ton of comparative insight into the longer term trends in the resort market going back ten years.
Its a good point and one I should look into.
Subject
incentive fees
Entry
12/10/2013 03:28 PM
Member
mpk391
I looked at this years ago and memory is hazy, but isn't there another incentive fee charged on at least one of
the development projects (with the overall Dolphin incentive fee charged on top of that) ? if so, are you
accounting for this in your DCF?

Subject
RE: incentive fees
Entry
12/11/2013 09:17 AM
Member
cfavenger
Mpk391, Can you be a bit more specific about where you think there may be excess performance fees? I'm not
aware of anything off the top of my head which fits that profile. I'm pretty sure I was as conservative as
possible modeling the performance fees since I deducted 20% from the net cash flows each year without
accounting for hurdle rates or return of capital, etc... Perhaps its just an excuse for laziness but I think when
doing a DCF on uncertain cash flows over 12 years, the more lines you have in your spreadsheet, the more you
are deluding yourself with false precision. The DCF exercise was just to show that there is a lot of upside
optionality on a directional basis.
Subject

RE: RE: incentive fees

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Entry
12/11/2013 01:38 PM
Member
mpk391
sorry but I just can't remember. if you've done your DD and didn't find any extra layers of fees, that's probably
better than my hazy memory
Subject
Q1 Update
Entry
06/11/2014 09:59 AM
Member
cfavenger
Dolphin released its Q1 trading update today.
The most notable item is that NAV/shr increased to 72p from 68p at YE13. The biggest driver of this change
was cancelling the sale of Venus Rock - a Cyprus development - to a Chinese buyer. This deal was struck in
May 2013 just as the Cyprus financial crisis was near its peak. DCI sold this property at the time at a markdown
to its previously estimated NAV in an attempt to reduce its Cyrpus risk exposure. Since then the Chinese buyer
was never able to secure financing for the deal.
This is far from the first time I have seen this pattern re: a Chinese buyer of assets. Since that time the Cyprus
environment has significantly improved and DCI is increasing the Venus Rock mark from this "firesale" mid2013 price to a normalized mid-2014 price. DCI says they have multiple interested buyers for Venus Rock. I am
not going to hang my hat on the new NAV mark yet but directionally it is a positive development. I don't have
insight beyond company statements but it seems fully plausible that DCI would take advantage of the Chinese
buyers' inability to secure timely financing to retrade these assets at today's much improved prices.
Another good development is that David Heller - the former Goldman Sachs powerhouse appointed to the board
by Third Point - will be taking over as Chairman. This further increases my confidence that the company's
assets will be managed for shareholder value.
Management believes that sometime in 2014 DCI should move into an excess cash generating position when
property harvesting exceeds development obligations. The company appears sensitive to the NAV discount
and actions such as buybacks are being contemplated. DCI is the proverbial slow-burn deep value story but if
NAV and/or my DCF derived fair value (100-150/shr) are in the realm of reality then these buybacks should
prove extremely accretive. Again, the shareholder base here (Third Point at the helm) with David Heller running
the board gives me confidence that if there is excess capital it will be deployed in a value creating manner.

Subject
why the selloff?
Entry
11/18/2014 05:38 PM
Member
mpk391
I quickly skimmed the mid-year report and it didn't seem that bad ... am I missing something or is this just a
victim of the oct 2014 microcap massacre?
Subject
Re: why the selloff?
Entry
11/19/2014 07:29 AM
Member
cfavenger
Not aware of any specific reason for the selloff for better or worse.

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