Posting has
been quite sporadic recently due to other commitments and will continue to be over
the summer months due to a project I’ve codenamed “beach”.
This write-up is
about a $300m market cap, Greece heavy, London listed luxury real estate developer so
if you feel like you can stop reading right here. The
company is called Dolphin Capital Investors and for me it’s the second time
around with the stock. I was involved back in 2012 and since then have been a spectator.
To give you
a brief background Dolphin is a luxury real estate developer focusing on
emerging markets (and now Greece fortunately or unfortunately classifies as one).
It’s essentially like a junior mining company that goes around prospecting on a
piece of land in hope of finding whatever minerals they are after, however in
this case the outcome is considerably more sexy. The company’s strategy since
inception in 2005 has been to acquire coastal land and develop high-end hotels
and resorts with world class partners. This meant that they have acquired a
large amount of land in sight in many countries for which realistically
speaking they didn’t have the money to develop and the company turned into a
hodgepodge of assets. I could spend pages about the history of the business but
I think to an extent it is not as relevant as what’s happening at Dolphin
currently.
But before
we get there just a brief overview of the business. The company owns and
develops projects in 6 different countries and breaks their projects into two
categories: core and major projects with the first being the more advanced
ones. In terms of NAV, around 80% is in Greece and Cyprus with the rest in
Croatia, Turkey, Panama and the Bahamas. Below are some slides from a recent corporate
presentation.
Source: Company. Note the figures are as of June 2014.
For more recent, though less colourful data refer to pages 16-17 of the Q4'14
report
Dolphin
published their Q4’14 update just a few days ago. NAV is currently €557m or around £68p on a per share basis (both € and £
will be used here as the company reports in € but listed in London so the share
price is in £). The share price is £21.5p
and is getting closer to 2012 levels. This translates into a discount of around 70%. And you might think that’s great…but why on
earth should I care, it’s been cheap for a very long time. And if you glance at
the below 5 year chart you are absolutely correct. Investors have been
reluctant to give full credit for Dolphin’s NAV due to questions on the
underlying valuation (i.e. how much of a decline in Greece is captured in the
figures) and risk of higher than expected cash burn (not unheard of for a
property development company).
Source: FT
This time is
(likely, maybe, potentially…hopefully) different. Let me take you back a bit to
2012. In October that year Third Point took a stake in a company via an equity
raise, participating in an aggregate €50m round at a price not too different from where we are today. The macro situation in Greece hasn’t been supportive, I think we
can agree on that, and I’ve also heard the same stories that you probably heard
about the management of the company so we can assume that Third Point must have
been getting pretty frustrated with this position. But they are still hanging
in there.
I’m going to
conveniently skip a few years and fast-forward to February 2015. Dolphin put
out a press release where they
announced plans to do the following (i) change the board of directors and add directors who either have significant
real estate background or represent key shareholders, (ii) review the
business plan, with focus on developing the core assets coupled with disposals, (iii) review management/investment manager compensation and (iv) less onerous governance. So far so good.
To follow up
on this the company announced the following a few days ago: (i) separation of assets into core and
non-core buckets with divestments on the cards, (ii) lowering the investment
management fee and (iii) €75m capital raise (inc. conversion of the 2016
converts). Let’s take these in turn.
The core
projects are as follows: Greece - Amanzoe, Kilada Hills and the Kea Resort; Playa Grande Club & Reserve
(Dominican Republic) and Pearl Island (Panama). The company aims to develop
these into resorts but further capital allocation is
controlled by the board. Regarding the non-core bucket (which is basically
everything else) the company plans to sell these eventually and will continue
developing them to an extent to increase value. Considering the company’s 49.8% stake in Aristo
(Cypriot residential real estate developer) the plan is also to sell out.
For what it’s
worth, the company sees total net cash flows from the development of core projects and asset sales of €320m during 2015-19 (majority in 2018-19). In addition, they estimate €384m residual value post 2020 and €101m NAV of the undeveloped land for a total value of €805m (pre-tax basis). The company also plans to reduce gross debt from €265m in 2015 to €42m by 2019. More details starting from page 50 of the attached. Returns from core projects and proceeds from asset sales will be distributed
to shareholders via buyback or dividend.
The
management fee, which is currently 2% of total equity (€681m as of June 2015 – annual
fee of €13.6m)
will we be cut to the lower of (i) €8.5m flat fee or (ii) 1.25% of GAV from
2017 onwards. All in the board sees around €23.5m savings over five years. The
performance fee has also been reworked substantially both on the returns from core assets
and sale from the non-core bucket. The investment manager has been granted
options totalling 6% of shares outstanding with the target share prices ranging
from £35-80p
for a five-year period (subject to periodical vesting and hitting performance targets).
Worth noting that three board members will also spend more time on Dolphin matters so
they’ll receive annual fees ranging from £150-200k and options totalling
1.25% of shares outstanding (less strict target share prices ranging from £35-50p). This is quite generous.
And last,
the €75m capital raise provides the “sources” for this new strategy. The company issued 219m shares at £21p (c. 7% discount to prior closing price). As part of
the capital raise Fortress, the investment manager and another investor also agreed to convert $14m of the outstanding at a lower conversion price (the
remaining c. $15m holders will stay put). The overall proceeds will be used for
working capital, 2015/16 opex, investment manager fees, interest and repayment
of the 2016 converts. On top of the €79m funding needs the company also
requires about €27m to fund the core projects, which they plan on sourcing
from asset sales, JV project financing or debt (you’ll find the details on
page 9 of the following document. Third Point subscribed to the capital raise and maintain their 20% holding (approx. £11m additional investment). Combined with
the other investors they’ll hold around 50% of the shares, while
the investment manager will own 9.7% of the shares PF for the capital raise. All in, share count increased from 640m to 905m.
Assuming all
of the above doesn’t work out the board will put the continuation of the
company to a shareholder vote before December 2016. If the outcome of this is a
vote of no confidence, the company could be wound up, liquidated, or
restructured. Thus there is additional time pressure on the management to
deliver.
Coinciding with the release of the strategic review Dolphin released the 2014 results, but honestly
it was a bit of a non-event amongst all the changes announced. The company
generated €22m in net income (first time ever!) though mostly helped by
gains on real estate revaluation. This implies around 12x
P/E on a fully diluted basis.
Per
the Q4’14 numbers NAV is £68p and the current share price of £21.5p for a discount close to 70%.
If you make the adjustments to take into account the recent capital raise the
discount closes to around 60%. And while discounts can move, perhaps it is somewhat reassuring that historical project exits took place at a money multiple of around 1.7x to cost.
Despite the
positive developments and announcements the share price has gone exactly
nowhere in the last few days. Perhaps the capital raise spooked people, though
not sure why as the business was in need of funding if they wanted to continue
development. Of course there is a small matter of execution as well.
Not even
sure where to begin with the risk factors: Greece, largely illiquid land
investments, so-so track record, asset hoarding and really I
could go on. However, with the changes around the board, governance, strategy,
compensation etc there might be something here warranting a closer look. I see this idea essentially as a deep value,
long-term option on the recovery of Greece and improvement in the company's strategy and execution.
If you
prefer to see what these guys do there is a short documentary on
YouTube. It’s worth a watch, some of their stuff is really sexy. Oh yes and in
closing, the company posts broker reports on their
website. Read those with a pinch of salt.
