Dolphin Capital Investors

BBERG Ticker (DCI LN)

Introduction
Company IPOd in 2005 In 3 equity raises from Dec 2005 to June 2007, DCI raised 536m Deployed cash rapidly into a land bank across several countries; strategy focused mostly on Southeast Europe (Greece and Cyprus) but have assets in the Caribbean (Dominican Republic, Panama) Leisure-integrated residential resorts JV with high quality branded operators (Ritz Carlton, Four Seasons, Aman Hotels) and exploit arbitrage between overly saturated Southwest market and equally compelling but untouched Southeast market

Introduction (and then the financial crisis hit!)

Global real estate markets froze; it goes without saying, market for ultra-luxury resort properties went off a cliff To add insult to injury, fiscal issues of Greek government were uncovered and became front page news globally ILLIQUID COASTAL LAND (largely unpermitted) + GREECE = DCIs stock falls off a cliff Untouchable in the eyes of institutional investors; the type of investment idea that money managers get fired for making! (and hence why this opportunity exists to make many times your money)

Thesis
Dramatically mispriced:
Trades at 70% discount to quarterly-adjusted NAV (as determined by Colliers International) Quarterly-adjusted NAV does not take into account full cash flow potential of assets, which makes the mispricing even more dramatic

Company has extremely high quality assets with first class partners In addition to company specific catalysts, Greece is de-risking and smart money is flocking to the name, which should cause upward pressure on share price in near term given how ridiculously cheap the name is However, real opportunity comes from long term cash flow profile of assets; they offer 5-10x return over a medium term time horizon (i.e., a 5 in 5)

Strategy

Overview of Strategy (1)

Property arbitrage between Southeast Europe (Spain, France) and Southwest Europe
Similar geographies/topographies/climates but Southwest Europe remains much less visited

Part of the reason for discrepancy is convenience; part of the reason is bureaucracy (this is probably the more relevant reason) DCI sought to exploit this arbitrage; biggest advantage for them is local knowhow: they have the local connections/experience to navigate the bureaucracies in these areas

Strategy (2)
Purchase unpermitted land at huge discounts to future NPV value.
Risky endeavor; securing permits is no easy task; if you cannot secure the adequate permits, land ends up worthless GS analyst estimates that a partially permitted project can enhance land values by 2x and a fully-permitted project can enhance land values by 4x.

DCI is an investor, not a developer, and looks to monetize assets at any point in the process; if it cannot secure appropriate value, however, the company will take a project from the cradle to the grave If they decide to take a project from the beginning to the end, it is important to realize there is a lot of upfront work with significant cash on the tail end of the process
1) buy land, 2) secure adequate permits, 3) build leisure components, 4) pre-sell and collect CF from residential components

Strategy (3)
Partner with ultra-luxury branded operator (Ritz Carlton, Four Seasons, Aman Hotels), which lends immediate credibility to the project
Also, allows company to exploit well-established marketing networks Knight-Frank research: branded residences command an average [price] uplift of 31% compared to equivalent non-branded schemes

Overview of Assets

4 Advanced Projects
Following recent equity raise of 50 million, all 4 projects are fully-funded for phase 1 Important distinction: phase 1 = leisure component (i.e., typically golf-course and hotel); phase 2 = residential assets (which are pre-sale funded) So, more or less, funding for all 4 advanced projects is completed Porto Heli collection has operating Aman Hotel that will be break even in 1st year (more than likely, company will look to divest in near term); Aman Villas are selling fast (have already sold 7 of 36 and hotel has only been open for 6 months) Playa Grande will have operating Aman Hotel at start of 2014; golf course is complete and villa sales will follow. Pearl Island has already been partially monetized (sold 7% of Island, or founders phase, to wealthy Panamanian RE investor for implied exit price of $23 milliona 46.5% premium to Colliers NAV) Venus Rock (2 golf courses are in the process of being built; despite early stages of project, have already realized pre-sales on residences; huge tailwind in Cyprus RE market from Chinese buyers looking to exploit permanent residence status offered by Cypriot government)

10 Major Projects
It goes without saying, the 4 advanced projects are worth well above the market cap; you are getting the 10 major projects and Aristo for free 10 major projects are still mostly in permitting, but as mentioned earlier, advancements in permitting can add significant value More than likely, in a harder RE market (which we are already seeing), company will look to divest some of these assets In fact, company will consummate divestment of smaller, Turkish assets at the beginning of the year (at a premium to NAV) With permitting advances, as well as myriad commitments from branded operators, these projects offer compelling value to potential RE investors as they reemerge from the woodwork

Risks

Overview of Risks
I think there are 3 main risks and I will try and systematically dispel all 3 1) Cash burn (i.e., the company does not have enough cash to develop the assets and will go bankrupt before any of its assets generate any cash) 2) The assets are worth well below their carrying value (i.e., Colliers is mispricing the assets; management is being disingenuous when they provide future cash flow guidance for the assets) 3) Management is incompetent; additionally, they are horrible stewards of shareholder capital (i.e., they have been collecting 2% management fees on $1 billion for the past 5/6 years, while the share price has crashed and the company has run into liquidity concerns, forcing them to engage in a highly dilutive equity raise in September)

Risk 1 = Cash Burn

DCI is not growing its portfolio; they are done with acquisitions; this is a selfliquidating trust; their cash needs are minimal Additionally, unlike 2/3 years ago, the company has FULLY-FUNDED assets that are both generating cash (i.e., Porto Heli) and assets that are approaching cash generation status (i.e., Playa Grande, Pearl Island, and Venus Rock) Harder RE market with increased transaction volumes; company has been able to make non-core, smaller divestments at NAV (or a premium to NAV) and should continue to do so Tight liquidity is actually a good thing; management teams with lots of cash get complacent; tight liquidity forces these guys to divest some of their non-core assets (something the market has been hoping for) Following the deconsolidation of Aristo, the only debt that is recourse to the holding company is a $40 million convertible maturing in 2016 (and which is in the money at 50p, which is a price target that should be reachable by then); all other debt is ringfenced at the project level Finally, the numbers do not lie; the recent equity raise, under very conservative assumptions, allows the company to have adequate liquidity for at least the next 2 years; which is sufficient time for some of the advanced projects to begin generating credible cash flow

Divestment Track Record

CASH NEEDS/COMMITTED FUNDS Investment manager fees Net finance expense Equity investment at Playa Grande Total predicted cash expenses Nikki Beach Seafront Villas Pearl Island Committed cash proceeds Cash at beginning of period (postequity raise) Cash at end of period (deficit) OTHER EXPECTED SOURCES 2H12 Porto Heli Aman Villas Nikki Beach Apartments Venus Rock Venus Rock Villas Playa Grande Aman Villas Expected cash from operating sources CASH SHORTFALL 2H12 2013 2014 Cash at the beginning of the period 60.8 37.8 16.7 Total predicted cash expenses 26.9 50.0 45.0 Committed cash proceeds 3.9 11.9 3.9 Expected cash from operating sources 0.0 17.0 33.0 Cash at end of period 37.8 16.7 8.6 *Very conservative: I do not include any value from a potential sale of the Aman Hotel in the Porto Heli Collection, profit-participation at the Seafront Villas, dividend support from Aristo, or further divestments at Pearl Island (which management assures me that a further deal is going to be announced very early in 2013) 0.0 0.0 2013 14.0 0.0 2014 14.0 0.7 2H12 8.9 13.0 5.0 26.9 1.9 2.0 3.0 6.9 2013 14.0 26.0 10.0 50.0 1.9 7.0 3.0 11.9 2014 14.0 26.0 5.0 45.0 1.9 2.0 0.0 3.9

60.8 40.8

40.8 2.7

2.7 (38.4)

0.0

3.0

6.0

0.0 0.0

0.0 17.0

12.4 33.0

Risk 2 = Assets are Mispriced

Easiest way to disprove this is to use highly conservative assumptions in your valuation (emphasis the word highly) and show that there is a large discrepancy between calculated NAV and current market value My valuation methodology = 1) value assets near cash-generating status using a DCF model, 2) value excess land at liquidation value (i.e., at a value that applies a substantial haircut to current comparable transactions or listing prices), 3) apply a 20% discount to the final value (i.e., because the stock is relatively illiquid) I cannot emphasize how conservative this valuation is:
I value Aristo at liquidation value (it should provide annual dividend support of 30 million in harder markets) Valuing land at liquidation value is illogical (as hotels/golf course are built, surrounding land appreciates many times) My valuation is well below CF forecasts provided by management Even if both of our valuations are well off, there is still substantial upside to this investment; there is an enormous margin of safety at current share price levels

My Valuation
OTHER MAJOR PROJECTS (AND ARISTO)
Total area (m2) Net area (m2) Estimated price/m 2 Net EV 2,800,000 2,184,000 20 43,680,000 650,000 435,500 20 8,710,000 1,720,000 1,720,000 20 34,400,000 3,100,000 3,100,000 20 62,000,000 4,400,000 2,640,000 20 52,800,000 110,000 110,000 20 2,200,000 3,190,000 1,588,620 51 81,019,620 4,610,000 4,610,000 51 235,110,000 630,000 630,000 24 15,120,000 120,000 120,000 48 5,760,000 270,000 270,000 51 13,770,000 3,920,000 1,952,160 51 99,560,160 TOTAL EV = 654,129,780 Project 1) Sitia Bay Golf Resort 2) Kea Resort 3) Scropio Bay Resort 4) Lavender Bay Resort 5) Plaka Bay Resort 6) Triopetra 7) Eagle Pine Golf Resort 8) Apollo Heights Polo Resort 9) Livka Bay Resort 10) Mediterra Resorts 11) Aristo Hellas 12) Rest of Aristo Country Greece Greece Greece Greece Greece Greece Cyprus Cyprus Croatia Turkey Cyprus Cyprus Ownership stake 78.0% 67.0% 100.0% 100.0% 60.0% 100.0% 49.8% 100.0% 100.0% 100.0% 100.0% 49.8%

CONSOLIDATED VALUATION

Group Valuation Porto Heli Venus Rock Playa Grande Pearl Island Total Advanced Projects Major Projects (and Aristo) Total EV Total Debt Total Cash Estimated Management Incentive Fee Calculated NAV = NAV (w/ 20% liquidity discount) = Fully Diluted Shares = Calculated NAV/Share = Current Price/Share = Upside = 163,014,625 167,625,280 431,982,392 74,881,600 837,503,896 654,129,780 1,491,633,676 140,053,000 60,872,000 177,490,535 1,234,962,141 987,969,713 642,440,000 1.54 0.41 275%

Risk 3 = Management are Charlatans

Perception = Management has been collecting 2% on $1 billion for the past 5/6 years, while the companys share price has traded at a huge discount to NAV and liquidity at the holdco has evaporated, forcing a highly dilutive equity raise Reality = Management is second biggest shareholder; Miltos, the managing partner, took at a c. $30 million bank loan in 2008 to buy shares at c. 1.30 (shares trade currently at 34p and that is after a substantial run-up recently in the share price). He, and his co-partner Pierre, are substantially in the red on their investment. Additionally, management was forced to add an additional 5 million in the recent equity raise. Its important to note, the investments by these guys are post-tax dollars; management fees, which are distributed to them and their 25/30 employees are pre-tax dollars!
Further, on a go forward basis, management fees will be permanently lower (new equity raise wont count towards fees and Aristo deconsolidation lowers fees by c. 4 million per annum) Finally, we are buying these assets at 20 cents on the dollar; this is more than baked into the price

Last point about management. Yes, they have made some mistakes. But, they also survived the worst RE depression in the last 60 years with a solvent company; and the company is poised to generate significant cash in the near/medium term.

Legacy Management Transactions

Date Shares Purchased Price Total Purchase Price 12/5/2007 4,250,000 1.25 5,291,250 12/6/2007 3,700,000 1.27 4,708,250 12/7/2007 1,900,000 1.28 2,432,000 12/11/2007 1,250,000 1.29 1,615,625 12/12/2007 600,000 1.29 774,000 12/13/2007 2,250,000 1.31 2,947,500 12/17/2007 950,000 1.32 1,254,000 TOTAL = 19,022,625

Management/Board Background
Miltos Kambourides = 2 degrees from MIT, founded Soros Real Estate Partners ($1 bn RE fund); ex-Goldman Sachs Pierre Charlambides = Helped run SREP with Kambourides; ex-JP Morgan and Hilton International Board of directors includes: 1) the former Minister of Commerce & Industry in Cyprus, 2) a former foreign policy advisor to the Turkish president, and 3) the 2010 Nobel Prize winner in economics

Shareholders

A few legacy investors (Fortress and Blackrock) but mostly new investors Presence of strong investor base at the top provides downside protection to shares (these guys have done their due diligence on DCI and will not be selling out until there has been meaningful share price appreciation)

What the Third Point Stake Means?

Proven and ruthless activist investors with 17.2% per annum return since inception in 1996
Recently, among other things, Third Point had CEO of Yahoo removed for inaccurate CV

Third Point has been given a board seat and have appointed someone who is vastly overqualified for the position Will have ability, given ownership stake and LT share price underperformance, to call shareholder meetings at their discretion and have board and management replaced Third Point is known for taking concentrated positions after having done significant due diligence. While this may not be a large position for them vis--vis the size of their fund, they have almost certainly done extensive due-diligence (ranging from hiring independent land appraisers to conducting background checks on mgmt., to double-checking land permits with lawyers, etc.) Finally, it goes without saying, management feels the pressure to execute and will be forced to execute over the next 2 years or lose their jobs

Catalysts
Sheer cheapness of stock combined with activist stake and presence of other credible investors is already creating substantial upward pressure on the stock (up 29% YTD; up 106% since September); makes new highs daily Continued asset sales at NAV or premium to NAV (should see sale of Turkish assets, as well as further smaller divestments at Pearl Island, announced in the next few weeks) A big deal, say 40 million or above, would be a huge catalyst. Even if this does not materialize, smaller deals combined with continued execution of the advanced projects and harder RE markets should be enough to very meaningfully close the current NAV discount

Conclusion
World class assets, world class JV partners, and a world class shareholder base Liquidating trust with little cash needs or operational complexity Company is trading at a huge discount to NAV (and an even bigger discount to the future NPV of its assets) with a clear path to closing this gap