Dolphin Capital Investors (DCI.L) – Liquidation – 90%+ Upside

Current Price: £0.035

Liquidation Value: £0.067

Upside: 90%+

Expiration Date: end 2024

This idea was hinted by Paul.

 

Dolphin Capital (DCI) is a London AIM-listed, £32m market cap real estate company undergoing liquidation. The potential upside could be close to 100% or higher, however, liquidity is extremely limited.

DCI is a luxury real estate holding firm with most assets in the Mediterranean (Greece/Cyprus) – resorts under development and undeveloped scenic land (whole peninsulas). Due to the self-enriching track record of the management and very limited liquidity (shares are tightly held), DCI.L trades at a 75% discount to the reported NAV of £123m (£0.135/share). The credibility of the reported NAV calculations is questionable, but even with large haircuts, there still is a 93% upside to the conservative estimate of distributions of £0.067/share (after liquidation expenses and incentive fees).

The major risk is getting in bed with Miltos Kambourides (founder/investment manager), who has a track record of enriching himself at the expense of shareholders. However, the DCI has recently implemented a number of highly positive governance/incentive scheme changes, which finally re-aligned investment managers’ incentives with the shareholders. That and a very large margin of safety as per the discount to BV, suggest that the risk of losing money here now is low.

 

Short background

Dolphin Capital is truly a textbook example of long term shareholder value destruction – DCI raised €1 billion of equity, listed on AIM in 2005, started trading around £0.78/share, reached £1.7/share in mid’07, got destroyed during GFC, and dropped to £0.4-£0.5/share levels, and now trades at £0.035/share (£30m market cap) without returning any cash to shareholders ever.

The company’s investment manager is Dolphin Capital Partners, controlled by Miltos Kambourides, who also sits on the DCI board. In 2016 the board decided to wind down the company and received shareholder approval. The liquidation was supposed to be done in 3 years but was extended in 2019 until the end of 2021. During these 6 years, the company managed to sell only around a third of its NAV and still made no shareholder distributions. The main problem was that the whole incentive scheme was structured poorly and basically incentivized the investment manager to stall the process as long as possible while pocketing massive fixed fees – around €25.5m since 2016.

However, last year, right before the investment managers’ agreement was set to expire (end’21), a lot of positive changes have taken place:

• First of all, early in the year (Jan-May’21), there was increased activity from major shareholders purchasing or increasing their stakes (Lars Ernest Bader, Discovery Investment, 683 Capital Partners). More details are in the “Major shareholders” section below.
• In June, DCI announced board refreshment with 3 out of 4 new directors. One of the seats was taken by Nicolai Huls an affiliate of Discovery Investment (became a major shareholder in March, 3.32% stake). Miltos Kambourides remained as the 4th director.
• In July, the new board announced a strategic review of the asset sale process and corporate governance practices. On top of that, the board members’ compensation was reduced significantly to €200k/year from €379k in 2020 and €496k in 2019. The election/re-election of the investment manager was delayed from September to December.
• In December – DCI announced a number of changes following the strategic review. Aside from a few cost-saving initiatives, the most important change was the investment managers’ agreement amendment. The fixed fee which used to stand at €3.6m/ per year in 2020/2021 was completely eliminated. The new agreement includes only performance fee (see table below) and doesn’t start accruing till shareholder distributions reach €40m (compared to today’s market cap of £32m/€37m). The company will cover the investment manager’s working capital commitments for 3 years in quarterly advances paying a total of €2.4m in 2022, €2.3m in 2023, and €1.3 in 2024m, but these payments will be set off against the accrued performance fee entitlements. To prevent cherry-picking in asset sales, 25% of the incentive fee will be held in escrow and released with the final distribution. Importantly, the new agreement was signed with only 1-year term – after this either party can terminate it on 6 months’ notice.

Putting it all together it kind of seems like DCI has finally received some pushback/pressure from shareholders and now the investment manager is finally forced and incentivized to liquidate the company.

 

DCI portfolio and valuation

The major/core RE assets consist of stakes in 2 luxury resorts in Greece that are currently under construction – Kilada Resort and One & Only Kea Island Resort – as well as an equity stake in Cyprus’ top real estate developer Aristos. Other assets are 5 mostly undeveloped land properties in Greece/Cyprus/Croatia, whole peninsulas in some cases (annual report, website).

All debt is at the property level, non-recourse to DCI. Kilada and Kea Island resorts are fully financed, so DCI doesn’t have exposure to any future development expenses.

The company doesn’t provide many details on the asset values, however, the total value of the assets seems to be €204m as of the June’21.

As of Dec’21 update, NAV stood at €152m, in line with the H1 report’s NAV before deferred tax liabilities. Deducting, DTL, the NAV stood at €145m.

Property valuations have been done by independent valuators, e.g. American Appraisal and Colliers, however, given the nature/location of the assets and current market conditions, it’s not clear how reliable the valuations are. Even in the 2016 wind-up agreement the company clearly emphasized that asset sales might happen at a material discount to NAV and the investment manager’s variable fee was based on the asset sale valuation range starting from a 50% discount to NAV. Valuations of previous sale transactions are a mixed bag – most smaller deals were done around BV, however, a larger one, Panama was sold in 2016 at a 32% discount to gross carrying value:

• Panama – €27.7m (equity consideration). Sold in 2018. 32% discount to the gross carrying value (asset value).
• Sitia Bay –  €14m in 2018. Sold around NAV.
• Triopetra – €4.1m in 2018. Sold around NAV.
• Nikki Bech – €1.65m in 2018 – at a small premium to NAV.
• Amanzoe – €5.8m. 8% premium to the gross carrying value.

The value for Kilada and Kea Island Resort properties should be estimated the most accurately of all DCI’s assets. Those are both large commercial properties, which have already started selling residences, and should also be the most liquid assets in the portfolio. The company states that in general the supply of development-stage luxury resort assets in Greece is poor and once the construction is completed (summer 2022 for Kea Island, end 2023 for Kilada), DCI’s resorts will have an appeal to a larger investment audience.

However, the situation in Cyprus is worse as its RE market has been strongly impacted not only by COVID/lagging tourism but also by the terminated citizenship-for-investment program in 2021. The program gave citizenship to everyone who made investments in Cyprus above €2.2m, which used to be a strong driver of the RE market. The program was terminated at the request of the EU. As for the COVID impact, DCI’s reports show that in 2020 DCI had a share loss of €9.4m for its stake in Aristo vs a €1.3m profit in 2019. DCI itself states that the relationship with Aristo has been complex – Aristo’s controlling shareholder has pretty much defaulted on DCI two times already (see more details below). Overall, it’s quite likely that the Aristo stake’s value is significantly lower than it sits on DCI books (€43m).

Land assets are quite large in terms of area size and all are at various stages of permitting. The company has also said that due to the ongoing issue with Greek, and Cypriot bank non-performing loans, debt financing for financial investors such as DCI is unavailable. So overall, it’s quite likely that these five properties will be difficult to sell (especially in Cyprus).

So for an optimistic scenario, we’re using management’s NAV estimate of €145m. For a more conservative scenario, we assume Aristo’s stake value to be zero and put a 20% discount on the remaining NAV.

A Conservative scenario of available shareholder distributions at €72m might be even too conservative. given that the investment manager’s incentive scheme is clearly structured for the highest compensation in the distribution range of €80-€100m.

 

More details on the assets

Kilada Resort – 93% stake held by DCI. 224 ha site composed of 18-hole Jack Nicklaus golf course, clubhouse, 260 golf residences, and a beach club. Phase 1 has been fully funded. As of June’21 all key contractors had been appointed and earthworks for half of the project area had been done. Completion is expected by the end of 2023. Phase 2 also includes a 100-room hotel and 88 branded villas, but apparently, the company intends to sell Kilada after Phase 1.

In August 2019, DCI sold 15% stake in Kilada for €12m to some international investor who agreed to subscribe for both common and pref shares. €6m pref shares have been issued in June’21. The sale valued the project at €80m.

In August 2021, 24 founder plots (residences) were sold for €10m to Amanzoe.

One & Only Kea Island Resort (OOKI) – 33% stake held by DCI. 60 ha site with 75 resort villas (1-3 bedrooms) and 20 private homes (2-6 bedrooms).

As of Aug’21 9 sales of private homes have been completed and additional 4 sale agreements were expected to be signed by the end of the year. DCI said the total sale value of the 13 properties would’ve been €45m. So all 20 private homes should be worth around €69m.

Resort villas are on sale ranging from €1m to €3.9m per property.

Aristo – 47.9% stake owned by DCI. Largest residential RE developer in Cyprus. Has over 60 mid-scale development projects under construction. DCI itself that relationship with Aristos has been long and complex.

Previously DCI owned 100% of Aristo – the last 15% were acquired in 2009 valuing Aristo at €951m. Then in 2012, DCI agreed to exchange a 50.25% stake with Aristo’s founder T. Aristodemou in exchange for his 34.14% holding in DCI. It was a NAV for NAV exchange and valued Aristo at €375m. Quite a drop in 3 years, likely due to GFC impact.

DCI retained a 49.75% stake, which book value was marked at €186m. Then in September 2016, DCI suddenly announced that it is selling the remaining Aristo stake to Aristodemou for €45m cash, 76% discount to BV. However, in May 2017, the transaction was canceled as Aristodemou defaulted on the payments. DCI received only €1.8m, the stake was lowered to 47.9% and its value has been written off to €43m.

Another interesting episode happened in August 2019 – DCI agreed to sell 37ha in its former Venus Rock project to another one of Aristodemou’s companies – Aristo Ktimatiki for €4m. The buyer paid only €0.5m and the remaining €3.5m is still in default.

 

Risks

• The timeline will prove to be longer than expected and due to low liquidity, it might be hard to exit the position.
• The investment manager’s track record is terrible and there’s a risk it will find more ways to siphon away the value from DCI shareholders. The financial reports are not very detailed and there’s limited visibility into the asset sale process, which makes it a fertile ground for related party transactions – e.g. what happened with the Venus Rock/Aristodemou deal. Another risk is that Miltos Kambourides (chair of the investment manager) might simply stand at the other side of the asset sale transactions. For example, DCI sold Amanzoe to Grivalia in 2018, however, the agreement also included that the investment manager will take a 15% stake in Amanzoe on the same terms + Amanzoe will be able to acquire 20 Kilada properties (founder plots) for €10m. As detailed above, in Aug 2021, 24 (4 more than initially agreed) properties were sold to Amanzoe.
• It’s not exactly clear how “real” the latest positive changes were, or it was only just for show. The new board and shareholder involvement look good on paper, however, previously during the liquidation, major shareholder affiliates were also sitting on the board (even J O Hambro Capital, for example, see below) and didn’t manage to do anything to create shareholder value or control Miltos Kambourides.

 

Major shareholders

• Lars Ernest Bader (some portfolio manager at QVT Financial) increased his stake from 4.35% to 5.58% in May’2021.
• Discover Investment announced a 3.32% stake in March 2021.
• 683 Capital Partners ($1.8bn AUM hedge fund, quite diversified) increased the stake from 7.28% to 8.38% in Dec 2020 and then to 9.2% in Jan 2021.