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 high-end 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 company’s 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 management’s 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.

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.

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 company’s 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 Point’s 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 management’s 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 250-300K.  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.

Catalyst