Description

Summary

Liquidation with >100% upside, limited downside and a first distribution likely in 2022.  Recent appointment of new Board and changed Investment Management Agreement a material catalyst that’s underappreciated by the market. 

Background

Dolphin (DCI) has been a disastrous investment for almost anyone other than Miltos Kambourides, the sponsor/manager of the vehicle.  In round numbers, DCI raised EUR1bn of capital, has a current market cap. of <EUR50M and has never returned any cash to shareholders.  Despite this Miltos has extracted hundreds of millions of Euros in fees. 

DCI owns real estate assets in the Mediterranean.  DCI traded at a large discount to NAV and activist investors became involved with the company.  In 2016 an EGM was convened and shareholders voted for the company to be put into liquidation with the objective of disposing of all assets and returning proceeds to shareholders.  The original end date for the liquidation was December 2019.  This was subsequently extended to December 2021.  DCI made limited progress on asset disposals over this time (although Miltos continued to extract material fees from the entity). 

A reasonable person may conclude that Miltos was not incentivized to sell the assets / liquidate the company but instead slowly bleed it of value in the form of ongoing fees.

So What’s Changed?

In July 2021 a new Board of Directors was put in place.  The new Board immediately reduced Director compensation and initiated a strategic review and in December 2021 announced revised Investment Management Arrangements and Liquidation Strategy.  The key elements of the new IMA are no fees accrue until shareholders receive a distribution, no incentive fees accrue until the current market cap has been returned to shareholders in cash distributions and (very importantly) the manager can be unilaterally terminated in 12 months.  There are also incentive fees incorporated int he new IMA that align interests re: value maximisation and realization.  In short, there is finally both a carrot and stick to incentivise the right behaviour from Miltos and complete the liquidation and return capital to shareholders. 

So What Are The Assets / The Company Worth?

A data point is book equity value which was EUR152M at 30-Jun-21.   

The asset side of the Balance Sheet is a series of real estate assets in the Mediterranean, details of which the company discloses as follows. 

Three ‘Core’ Assets comprise the bulk of the company’s value:

• Kilada => 224 hectare site which includes 260 residences surrounding a 18-hole Jack Nicklaus Signature golf course and a beach club.  A 100-room hotel and 88 branded villas are also planned
• One&Only at Kea Island Resort (OOKI) => 75 resort Villas and private homes
• Aristo => largest private landowner and home developer in Cyprus 

The remaining assets are mostly development land in Greece, Cyprus and Croatia.  It’s worth noting that the debt shown against the Croatian property (Livka Bay) is non-recourse to DCI. 

At 30 June 2021 the combined carrying value of Kilada, OOKI and Aristo was EUR112 million (individual valuations are not provided).  Notwithstanding limited granularity on the individual assets this valuation doesn’t seem unreasonable based on a bottom-up assessment. Specifically:   

• Kilada => The master plan and reservations to date are available here.  The approximate value of the land in Phase 1 and Phase 2 is EUR90M based on listed sale prices.  These prices are consistent with company disclosures regarding sales to date.  There is further value from the hotel and hotel-branded villas (which are not included in the Phase 1&2 values above).  DCI has disclosed that construction costs are approximately EUR20M (excluding the hotel & branded villas) and an international family office as contributed EUR12M of preferred equity to the project (which would need to be repaid from proceeds from land sales)
• OOKI => DCI disclosed EUR45M of sales value from 13 properties in the HY 2021 report.  The total project size is 75 properties and DCI’s interest in the project is 33% 

The implied carrying value of the remaining assets is EUR89M (EUR201M less EUR 112M for the main three assets).  These assets are predominantly development land and therefore much more difficult to appraise accurately.  

DCI’s primary liability is EUR13M of loans outstanding (per Dec’21 EGM circular).  Other liabilities include option contracts for certain land in Greece, payables and deferred tax liabilities.

Summary Valuation

The low/mid/high values below illustrate the asymmetry at the current market valuation.  This is predominantly because (i) the company has very limited liabilities (minimal financial liabilities and the largest other liabilities are option contracts (which do not need to be exercised) and deferred tax liabilities (which will not be payable in the event of low value outcomes); (ii) the value of the largest assets is de-risking quickly as asset sales progress; and (iii) the current market valuation is so low.  

Thought of in reverse a 'breakeven' outcome would be the three core assets achieving a 50% haircut to carrying value and the non-core assets achieving an 80% haircut to carrying value (holding the rest of the assumptions in the 'low' case below constant).  Given the reservations/sales that have taken place to date at Kilada and OOKI this seems unlikely and too conservative.  

Notes

(1)     Low/Mid/High cases haircut carrying value by 40%/25%/10% respectively

(2)     Low/Mid/High cases haircut carrying value by 80%/50%/30% respectively

(3)     Interest bearing debt includes leases

(4)     Option contracts relate to land in DCI’s Lavender Bay project.  The options will not be exercised unless the value of the land exceeds the option payment so the liability is excluded from the valuation in the lower value cases

(5)     Deferred tax liability is based on asset value

(6)     Estimate

(7)     Calculated based on incentive fee structure in new Investment Management Agreement

(8)     Based on current GBP:EUR FX rate

Liquidation Timeline

The new Board has indicated that it believes value will be maximised by waiting to complete the sale of OOKI and Kilada until both properties are operational (2022 and 2023 respectively).  The other assets will be monetized as soon as practical with a final liquidation date of YE 2024.  As such, I anticipate the first liquidating distribution in 2022 with subsequent distributions as further assets are sold.

Why Does the Opportunity Exist

I believe this exists because of the history of the company (and with Miltos in particular).  The new Board is comprised of individuals with experience in liquidating companies as well as representatives from large shareholders and has already shown they intend to put measures in place to address legacy issues with Miltos and also to maximise value and distributions for shareholders. 

Catalyst

Asset sales and the payment of liquidating distributions.