dolphin capital investors (dci ln) investment thesis

Dolphin Capital Investors (DCI LN) is a name that I first researched back in February. Several interesting

developments have taken place in the interim, and I have decided to revisit the investment thesis.

Dolphin Capital Investors (‘DCI’) is listed on the LSE’s AIM index. The Athens‐domiciled company is part

property developer and part property investor, with a focus on leisure‐integrated residential resorts in

Southeast Europe, the Caribbean, and Central America. Including its IPO in 2005, the company has raised

a total of €948 million in equity and accumulated a land bank at a cost base of €525 million. With a

current market cap of €210 million, the company is trading at a 60% discount to the cost base of its land

bank and a 70% discount to its NAV.

The market swings between emotions of fear and greed. In DCI’s case, the market is being unnecessarily

fearful. DCI’s land bank is primarily located in Southeast Europe, with the majority of its assets in Greece

and Cyprus. Furthermore, the land bank was accumulated prior to 2008, at the height of the global real

estate boom. For these two reasons and liquidity concerns at the holding company, DCI has been left for

dead.

DCI presents a risk/reward asymmetry that is rarely observed. As I will show in this research note, the

company is fortified by a strong balance sheet, has a talented management team of owner operators,

and has a land bank that has been prudently accumulated and will generate significant cash flow in the

short and medium term. My conservative valuation predicts 350%+ upside to the current share price.

Company Background:

DCI was formed with the intention of exploiting a property arbitrage opportunity that exists between

Southwest Europe and Southeast Europe. As the above table shows, the two geographies have similar

landscapes. In fact, based on criteria such as number of “Blue Flag” beaches and shoreline lengths,

Southeast Europe appears to offer a more appealing setup to potential vacationers. However, reality has

favored Southwest Europe, and Southeast Europe has failed to attract the same number of tourists. Part

of the reason for this trend is related to proximity: Northern Europe, a very important market for both

locales, is obviously closer to Southeast Europe. Other major reasons for the discrepancy include

underinvestment in resort infrastructure. Local politics in Southeast Europe are filled with layers of

bureaucracy and taking a plan from the cradle to the grave can require hundreds, if not thousands, of

signatures and approvals.

When I spoke with an analyst from Edison Investment Research, he cited “local knowhow” as one of

DCI’s key strengths. In particular, he was struck by management’s ability to navigate the dense

bureaucracies of several key portfolio countries. Developers and resort operators want to establish a

greater presence in the region but are turned away by the daunting task of needing to form political

connections. “Local know” is therefore a key barrier to entry and provides significant downside

protection to the value of DCI’s land bank. An analyst from Goldman Sachs notes that merely securing

the appropriate permits to build a resort can enhance the land’s value by 4x.

all figures in €m Country Net Land Ownership (hectares) Net Independent RE Value

Advanced Projects

1) The Porto Heli Collection Greece 334

2) Venus Rock Golf Resort - (part of Aristo) Cyprus 498

3) Playa Grande Club & Reserve Dominican Republic 941

4) Pearl Island Panama 864

TOTAL 2,636 371

Major Projects

5) Sitia Bay Golf Resort Greece 218

6) Kea Resort Greece 44

7) Scropio Bay Resort Greece 172

8) Lavender Bay Resort Greece 310

9) Plaka Bay Resort Greece 264

10) Triopetra Greece 11

11) Eagle Pine Golf Resort - (part of Aristo) Cyprus 159

12) Apollo Heights Polo Resort Cyprus 461

13) Livka Bay Resort Croatia 63

14) Mediterra Resorts Turkey 12

Aristo Hellas Cyprus 27

TOTAL 1,741 230

Aristo Cyprus Cyprus

Magioko 5

Paphos Center Plot 5

Panorama Residences 5

Other Aristo Cyprus 179

TOTAL 195 30

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Europe, the company added assets in 2007 in the Caribbean and Central American. While these areas

are slightly more saturated resort markets than Southeast Europe, DCI has found opportunities in the

Dominican Republic and Panama to develop an ultra‐luxury product that appeals to high net worth

individuals in North America, as well as surrounding geographies in Central and South America. As a

percentage of the company’s total land bank, the assets in the Caribbean are substantial. When broken

down by investment cost, the exposure to this region is viewed as less material.

As the top chart shows, the company’s share price performance since 2005 has been very disappointing.

Most of the disappointment can be attributed to exogenous macroeconomic factors. The bottom table

shows the company’s major fundraising efforts in the public markets. Most of the equity financing was

raised prior to the share price collapse of 2007 and 2008, and as such, the average price paid for new

shares (85p) is significantly above the current share price (26p). The company engaged in a €62.5 million

(I apologize for switching between currencies; the company reports in Euros, but is quoted in Pounds)

share buyback in the summer of 2008. The buyback had little impact in slowing the share price collapse,

and the company has had to conduct 2 subsequent equity raises to cover expenses at the holding

company and other smaller equity commitments at the project level. The most recent equity raise in

Fundraising- primary and secondaryDate Number of shares (m) Price (p) Total fundraising (€m)

Pre-IPO Jun-05 5.00 n/a 5.0IPO Dec-05 104.00 68 104.0Placing Oct-06 217.96 93 300.0Placing Jun-07 178.04 170 450.0Placing Dec-11 26.21 27 8.5Placing Sep-12 204.44 20 50.0

AVG/TOTAL 735.65 85 917.50

September 2012 involved New York‐based hedge fund Third Point Capital. Third Point contributed €30

million, the founding partners contributed €5 million, and the remaining €15 million was purchased by

existing shareholders (this last portion of the rights issue was more than 4x oversubscribed).

The prior table was taken from the company’s latest interim report. Since accumulating the current land

bank, mostly from 2005‐2008, the company has diligently acquired the necessary permits to begin

breaking ground on various sections of its advanced projects. The permitting process is on‐going for

most of the major projects but significant progress has been made. In the introduction to this research

note, I describe DCI as “part property developer and part property investor.” This distinction (both

developer AND investor) is important when analyzing the progress in the permitting process. DCI is

inclined to monetize investments as it sees fit, and the company will make divestments at any stage

during a project’s lifecycle. As mentioned earlier, the GS analyst who covered DCI estimated that a fully

permitted project enhanced land values by 4x. He also indicated that a partially permitted project

enhanced land values by as much as 2x. This will become more important later as I delve into the

company’s strategy, but the meaningful progress made on the permitting front should not be viewed

lightly. As strategic buyers begin to reemerge from the woodwork, DCI will be able to make divestments

at NAV (or a premium to NAV) and lend credibility to the independent valuations of its portfolio.

In this next table, I have included a historical list of divestments. The Aristo Developers deal, which took

place in March 2012, was a share swap. Specifically, the original founder of Aristo swapped his

ownership stake in DCI for a controlling stake in Aristo. Still, the deal was struck on terms that

represented a positive investment return for DCI, and it had the added benefit of removing Aristo debt

from the company’s consolidated financial statements. Another noteworthy deal was the Nikki Beach

exit, which was finalized in September 2012. The Swiss Development Group (‘SDG’), a prominent luxury

resort investor, was the buyer. In recent conference calls, the company has mentioned the Nikki Beach

deal as a sign of good things to come. By transacting with SDG, the company reaped a two‐fold benefit:

firstly, SDG is a discerning buyer, and their choice to purchase from DCI sends a strong message to the

market affirming the quality of DCI’s assets; secondly, SDG has deep pockets, and if things go smoothly,

future DCI/SDG deals appear likely.

Exits as of Sept. 26, 2012

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Tsilivi ‐ Aristo 11 100% 2 7 3.50x

Amanmila 210 100% 2.8 5.4 1.90x

Kea 65 33% 4 4.1 1.00x

Seafront Villas 3.6 100% 9 14 1.66x

Kings' Avenue Mall 4 100% 11 15 1.36x

Aristo Developers Ltd 1,351 50% 208 375.5 1.80x

The Nikki Beach Resort & Spa at Porto Heli 1 75% 4 6.9 1.83x

Pearl Island Founders Phase 106 100% 6 10.6 1.73x

TOTAL 1752 247 439 1.78x

Management Background/B of D/Fees/Corporate Structure:

DCI is the main investment vehicle of Dolphin Capital Partners (‘DCP’), which is an independent private

equity firm started in 2004 by Miltos Kambourides and Pierre Charalambides. As far as I can tell, DCI is

DCP’s only material investment. In addition to the 2 founding partners, Kambourides and

Charalambides, the company lists 7 employees in investment management, 2 in IR/marketing, 7 in

finance, 1 in IT, and 6 in admin (25 employees total).

Kambourides and Charalambides previously worked together at Soros Real Estate Partners (‘SREP’),

where Kambourides was a founding partner. According to DCP’s website, “SREP was formed in

1999…[when] the company raised a US$1 billion fund and executed a number of complex real estate

transactions in Western Europe and Japan, including a significant investment in several master‐planned

leisure‐integrated residential community developments in Spain.” SREP was also significantly involved in

Southeast Europe, and Kambourides and Charlambides are noted for taking the reins on these deals.

Prior to SREP, both Kambourides and Charalambides were involved in real estate in some capacity.

Kambourides worked at Goldman Sachs, spearheading “real estate private equity transactions in the UK,

France and Spain.” And Charlambides worked at both JP Morgan (primarily in an M&A advisory role) and

at Hilton International, where he “managed the execution of over US $150 million worth of new Hilton

International hotel development projects in Canada, the Caribbean, France, India and Scandinavia.”

The board of directors consists of five independent non‐executive directors and Miltos Kambourides.

The independent directors share a nice mix of political wherewithal and investment savvy. Andreas

Papageorghiou, the chairman, is the managing director of a prominent Cypriot law firm and “from 1978

to 1980, he was the Minister of Commerce & Industry [in Cyprus] and from 1981 to 1993, he was the

general manager of the Cyprus Housing Finance Corporation.” Cem Duna, another director, manages a

leading Turkish consultancy company and has held various roles in the Turkish government, including

positions as a direct ambassador to the United Nations and “as the late [Turkish] President Turgot Ozal’s

foreign policy adviser.” Finally, a third director, Christopher Pissarides, was (in addition to other various

accolades and impressive business/government roles) the recipient of the 2010 Nobel Prize in

economics. Following the underwriting of the recent €50 million equity raise, and their subscription to

€30 million worth of shares, Third Point Capital will be allowed to appoint a single non‐executive

director to the board. Given Dan Loeb’s track record of generating shareholder value, this development

should be viewed very favorably.

The management fee structure is conventional. The base fee is calculated as 2% of equity funds raised

(plus any further gross equity proceeds and retained earnings), which as of now, is €890 million (a side

letter agreement was reached to exclude the recently added €50 million from future fees). A 20%

performance fee is paid on returns above an 8% annualized hurdle rate, and performance fees are held

in escrow and released incrementally upon the achievement of various aggregate return targets.

Performance fees held in escrow are currently immaterial. My expectation, as I will later use in

estimating the company’s immediate cash needs, is €17.8 million in management fees in both 2013 and

2014.

Shareholders:

The shareholder list includes many noteworthy names. Third Point is now the largest shareholder, but

Toscafund Asset Management has been aggressively adding to their new position. Blackrock and

Fortress remain long term shareholders. Peter Collery, one of David Einhorn’s early mentors, owns a

2.92% stake in the company. Finally, Miltos Kambourides has a 13.51% stake.

Corporate Strategy (in‐depth):

In the land acquisition process, the company takes on enormous risks. For one, the company purchases

unpermitted land. If DCI cannot secure the adequate commercial rights, the land becomes, more or less,

worthless. Obviously, the risk turns into reward if the company secures permits, but determining

appropriate land acquisitions is a discerning process that requires experience and savvy. Risk mitigation

comes from extreme due‐diligence (which includes discussions with the appropriate political channels)

and by disciplined purchasing of land at low prices that offer extremely positive risk/reward

asymmetries if the appropriate permits are eventually secured.

After the land acquisition is made and the appropriate permits begin to be acquired, DCI initiates the

planning process by searching for well‐known (branded) luxury resort operators to partner with. DCI is in

the business of developing leisure‐integrated residential resorts, and any given project can include 1 to

several branded operators. As the tables above show, the list of branded operators for the various

leisure components includes Aman Resorts, Nikki Beach, Waldorf Astoria, and Jack Nicklaus. DCI has also

secured commitments from Ritz Carlton and Four Seasons to develop separate luxury hotels on Pearl

Island.

The benefits of securing a branded partner are manifold. Most notably, the marketing channels available

to companies such as Ritz Carlton and Four Seasons are well‐established and will benefit DCI by not only

increasing hotel occupancy levels but also producing stronger pre‐sales of its residential units. I will go

into this in greater detail later, but ultra‐high net worth individuals (DCI’s target demographic) are

reluctant to purchase residences at non‐branded sites. As such, brand associations are key for DCI (and

also a barrier to entry for competition), and so far, the company has been extremely adept at forming

relationships with a diverse group of upper‐echelon branded operators.

The above chart broadly summarizes the development process from the cradle to the grave. On the

funding side, the company is highly sensitive to the potential risks that come with full‐scale land

development in remote locations and seeks to maintain an over‐capitalized holding company. Land

purchases are, therefore, made on a debt‐free basis. Further equity contributions are made to develop

the initial infrastructure requirements of the project and the initial leisure component/components

(with a modicum of debt‐financing brought on). In total, the company targets a 15‐15‐70 financing

structure on each project, where 15% of total funding is equity‐backed, 15% is debt‐backed, and the

remaining 70% comes from pre‐sales. Projects can also include sizable government subsidies. In the case

of Amanzoe, the Greek government approved state subsidies amounting to €7.8 million. All debt

financing is ring‐fenced with absolutely NO claims on the holding company. The only exception to this

rule is a $40 million convertible bond (sorry again for switching in between currencies) issuance from

March 2011 (well out of the money, with a strike of 50p). The funds were used to progress golf course

construction at Playa Grande and are set to mature in 2016.

In the next section of this research note, I will include a case study of Pearl Island that illustrates the

basic flow of project development, but it is important to understand that DCI incorporates broadly the

same framework across each project. The leisure component/components is the centerpiece of each

project and is the requisite first step at any of DCI’s leisure‐integrated residential resorts. This makes

logical sense because you cannot market Aman Villas without first having an established Aman Hotel or

an Aman Beach Club, and similarly, you cannot market villas at a golf course without first having a

playable golf course. The leisure component necessarily predates the construction of residential units

because the leisure component is the drawing force.

One important note on construction is that the company tends to use local contractors. For Venus Rock

and other Aristo projects, Aristo obviously performs the construction in‐house. In a case study of

Amanzoe, the company outlined the tendering process for the project. The process lasted from fall 2009

to winter 2010. From a long list of contractors, the company selected five names for final consideration.

Out of those five names, proposals ranged from €35 million to €58 million. DCI eventually negotiated a

€33.5 million contract with Domotechniki, a firm based in Northern Greece with what the company

describes as a “fairly solid balance sheet” and annual revenues of €80 million. A 15‐year, €33 million

term construction facility was negotiated with local lenders at 650 bps above six‐month Euribor. With

expected state subsidies, the net consideration on the facility is brought down to €25.2 million.

For DCI, only a small portion of its earnings potential comes from a project’s leisure component. Rather,

the bulk of future cash flow can be expected from the sale of residential units, where the funding is

done on a highly advantageous, pre‐sale basis. However, getting to the cash‐cow stage of a project is

time consuming and requires significant up‐front cash considerations in addition to overcoming the

aforementioned regulatory burdens. Some of this up‐front cash burn, as I will show in the Pearl Island

case study, can be curtailed by bringing on JV partners or simply divesting assets en masse after value‐

added permits have been secured.

Pearl Island (Case Study):

One highly illustrative example of the corporate strategy is the Pearl Island project. In July 2008, DCI

acquired 60% of Pearl Island from Grupo Eleta at an entry price of $1 per m2, with an additional

consideration of $3 per m2 contingent on the project obtaining full permits. By July of 2009 (1 year

later), the company had obtained full zoning and permits for more than 4 million m2 of developable

land, which will end up including c. 1,100 residential units, 6 luxury hotels, an international airport, and

a marina with up to 500 berths.

In 2011 (year 3 of the project), DCI and Grupo Eleta jointly invested an additional $12 million into Pearl

Island. The funds were allocated towards basic infrastructure needs, ranging from road construction to

the establishment of basic water infrastructure to phase 1 construction of the airport. Other up‐front

costs included various architectural fees. It was around this time that DCI received commitments from

Ritz Carlton and Four Seasons to develop separate luxury hotels on the island. Ritz Carlton, in particular,

signed a letter of intent to build a Ritz Carlton Reserve Hotel with 80 suites (adjacent to the founders’

phase). As expected, the company allocated contracting work on the founders’ phase to various local,

reputable operators and announced the sale of 20 lots (out of 35) at an average value of $180/m2 (for

just the land). Further, DCI obtained $15 million of bank debt from a syndicate of local lenders.

In 2012 (4 years into the project), DCI announced the sale of its 60% stake in the founders’ phase to

Alberto Vallarino, a large Panamanian real estate investor for an implied exit price of $23 million (it is

important to mention that the founders’ phase represents only c. 7% of Pearl Island). The $23 million

represented an 87% premium to the initial cost base and a 46.5% premium to the NAV booked by

Colliers. The intangible benefits of this exit are enormous and not easily quantifiable. For one, DCI still

controls 93% of the island, and an acceleration of the founders’ phase (which this transaction does) will

help boost adjacent land prices. Additionally, by exiting the founders’ phase, DCI frees up future capital

commitments and can now allocate resources towards phase 1 and phase 2. DCI also has the option of

pursuing an early exit from Pearl Island altogether. Based on the implied exit price from the founders’

phase, DCI’s stake in the remainder of Pearl Island is valued at $130 million, or a 214.5% premium to the

current NAV. More than likely, DCI will seek JV partners to develop phases 1 and 2, but if a reasonable

bidder came along, the company would be more than willing to exit the project.

Structural Drivers/Status Quo:

Pearl Island founders' phase exit Pearl Island (total implied NAV)Total allocated cost $12.3 million Founders phase $23 millionColliers' NAV $15.7 million Implied NAV of Pearl Island* $217 million

Net implied NAV $130 millionImplied cash exit* $10 millionInfrastructure commitment $13 million Current NAV $41 millionTotal implied exit price $23 million

Premium to current NAV 214.5%Premium to cost 87.0% *Assumes, from company guidance, that the founders'

Premium to Colliers' NAV 46.5% phase is c. 10% of future island profitability

*DCI w as paid $6 million for a 60% stake, so the

implied cash exit on a gross basis w as

$6 million/60% = $10 million

Tourist arrivalsLocation Time period YOY change +/-Global Jan 1 - May 1 2012 5.0%Cyprus Jan 1 - Aug 1 2012 3.5%Dominican Republic Jan 1 - Aug 1 2012 7.3%Greece Jan 1 - Aug 1 2012 0.0%Panama Jan 1 - May 1 2012 4.7%Turkey Q1 2012 -6.0%

The prior 3 tables reveal a few noteworthy trends about the current operating environment. For one,

tourist activity appears to be increasing moderately, albeit off of a very low base, and this is a positive

trend that is expected to continue. However, DCI offers a product that caters to the very high end of the

market, and it would be inappropriate to make any meaningful conclusions off of such a broad data

point. Instead, more narrowly defined structural growth drivers, such as trends among the ultra‐rich,

need to be examined.

In their report entitled “Branded Developments,” Knight‐Frank concludes that demand for branded,

residential property is strong and expected to strengthen in the coming years. A number of factors,

including the recent volatility in financial markets, have convinced wealthy individuals to increase their

allocation to tangible assets. In particular, branded properties are the major beneficiary of this trend.

For potential buyers, brands represent quality and an assurance of value preservation. Knight‐Frank

notes that “branded residences command an average uplift of 31% compared to equivalent non‐

branded schemes.”

Aristo client originLocation 8 months to Aug 31, 2012 8 months to Aug 31, 2011Russia 39.23% 48.31%China 22.37% 0%Other overseas 18.12% 12.17%Cyprus 15.79% 31.03%UK 4.48% 8.48%

Finally, Aristo Developers has witnessed a surge in Chinese buyers, a demographic that has previously

contributed immaterially to results. This growth in Chinese activity is directly attributable to recent

legislative changes introduced by the Cypriot government. The new legislation entitles individuals and

their immediate family members to “permanent residence” status if they purchase a property exceeding

€300,000. This specific tailwind is expected to continue and should contribute meaningfully to future

dividend support from Aristo.

Cash Needs:

As noted in the introduction to this report, much of the depressed valuation in DCI’s shares is related to

local factors (Greece, undeveloped/non‐cash generating assets, etc.), but an even more significant

overhang has been liquidity‐related. Transitioning a project through its lifecycle requires significant up‐

front cash outlays with no material cash generation until the medium term. Despite prudent risk

management, DCI saw BS cash decline to under €11 million at the end of 2011. With the €50 million

equity raise, as the following table will show, DCI addressed these concerns vigorously and will be fully‐

funded for the next 2 years (under conservative assumptions).

CASH NEEDS/COMMITTED FUNDS2H12 2013 2014

Investment manager fees 8.9 17.8 17.8Net finance expense 13.0 26.0 26.0Equity investment at Playa Grande 8.8 17.5 8.8Total predicted cash expenses 30.7 61.3 52.6

Nikki Beach 1.9 1.9 1.9Seafront Villas 2.0 7.0 2.0Pearl Island 3.0 3.0 0.0Committed cash proceeds 6.9 11.9 3.9

Cash at beginning of period (post-equity raise) 60.8 37.1 (12.4)

Cash at end of period (deficit) 37.1 (12.4) (61.0)

OTHER EXPECTED SOURCES2H12 2013 2014

Porto Heli Aman Villas 0.0 14.0 14.0 Nikki Beach Apartments 0.0 0.0 0.7 Exit of Aman Hotel 0.0 20.6 0.0

Venus Rock Venus Rock Villas 0.0 3.0 6.0

Playa Grande Aman Villas 0.0 0.0 12.4

Expected cash from operating sources 0.0 37.6 33.0

CASH SHORTFALL2H12 2013 2014

Cash at the beginning of the period 60.8 34.1 22.2Total predicted cash expenses 30.7 61.3 52.6Committed cash proceeds 3.9 11.9 3.9Expected cash from operating sources 0.0 37.6 33.0Cash at end of period 34.1 22.2 6.6

Furthermore, by ensuring liquidity for the next 2 years, DCI allows its advanced projects to begin

generating significant cash flow. As such, the recent equity raise ensures not only near term liquidity,

but it transitions DCI into a sustainable structure that will be able to fund future development projects

from operating cash.

Following the €50 million equity raise (looking at the above table), the company’s cash position at the

beginning of H2 2012 is estimated at €60.8 million. Future cash outlays with respect to operations are

estimated at a run rate of €43.8 million, which is split between management fees of €17.8 million and

net interest payment of €26 million. One of the primary reasons for the rights issue was to inject equity

in Playa Grande. Based on management’s guidance, I estimate that the €35 million equity injection is

spread out over 2 years with €8.75 million taking place in H2 2012, €17.5 million in 2013, and the

remaining €8.75 million in H1 2014. Next, committed cash proceeds from recently announced

divestments (Nikki Beach, Seafront Villas, and Pearl Island) are accounted for. To be conservative, I have

not accounted for any profit participation in the future sale of the Seafront Villas.

With only the committed cash proceeds from announced divestments, DCI has a cash shortfall of €61

million by the end of 2014. However, other expected sources of cash will fill in this gap. The bulk of

those cash flows will come from sales of Aman Villas (all of my assumptions are displayed in greater

detail in the valuation appendix) at Porto Heli and Playa Grande and an exit from the Aman Hotel.

Obviously, there is some risk that these assumptions do not materialize but, to be conservative, I have

made no provision for any number of other potential sources of cash flow: among other things, these

sources could include full or partial exits from major projects, a full or partial exit from Pearl Island,

and/or dividend payments from Aristo. By the end of 2014, my forecasts show that DCI retains surplus

cash and is well positioned to capture the operating cash flow from its advanced projects in 2015 and

beyond.

Obviously, it would be preferred that DCI had a stronger cash position, but given the unprecedented

headwinds of recent years, the fact that the company is still solvent is a huge accomplishment and a

testament to the risk management employed by its founding partners. As evidenced by the current

valuation, the market clearly has lingering concerns about the company’s liquidity profile, but my

forecasts find these concerns overstated.

Management Cash Flow Projections:

The following table shows management projections for future cash flows. Assuming all of the advanced

projects and major projects are held and operated to completion, DCI estimates future cash flow from

the current portfolio of €4,154 million. To determine an NPV value, management fees, corporate

expenses, various marketing/ branding fees and taxes need to be accounted for, but even if cash flows

come in well below forecasted level, the value should dramatically exceed the current market cap of

€210 million.

Valuation:

For organizational purposes, I have included a valuation appendix that carefully details my assumptions.

The above table summarizes the results, which determine an NAV/Share of €1.54 (366% above the

current share price of €0.33). The valuation incorporates a mix of NPV‐style values (for projects on the

verge of cash generation) and NAV calculations based on comparable land transactions and listing

prices. In particular, the valuations based on comparable land transactions and listing prices should

prove to be overly conservative.

For valuing excess land in Cyprus, the Dominican Republic, Greece, and Pearl Island (see private island

transactions in appendix), I determined an average land price/m2 for each locale based on recent

transaction values and applied a 50% haircut. For excess land in Turkey and Croatia, I determined an

average land price/m2 for each locale based on recent listing prices and applied a 75% haircut. The latter

valuation methodology (for Turkey and Croatia) could be viewed as inappropriate, and I agree that a

transaction‐based value would have been more credible. However, I had difficulty locating transaction

values in these geographies, and, even if my methodology is flawed, the contribution from Turkey and

Croatia (€20,880,000) ends up being immaterial to group NAV.

Finally, to continue with this trend of conservatism, I apply a 20% liquidity discount (30 day average

volume of £572k) in determining the final group NAV.

Group Valuation

Porto Heli € 163,014,625Venus Rock € 167,625,280Playa Grande € 431,982,392Pearl Island € 74,881,600Total Advanced Projects € 837,503,896

Major Projects (and Aristo) € 654,129,780

Total EV € 1,491,633,676Total Debt € 140,053,000Total Cash € 60,872,000Estimated Management Incentive Fee € 177,490,535Calculated NAV = € 1,234,962,141NAV (w/ 20% liquidity discount) = € 987,969,713

Fully Diluted Shares = 642,440,000Calculated NAV/Share = € 1.54Current Price/Share = € 0.33Upside = 366%

Risks:

When a stock trades at an enormous discount to NAV, two possible explanations for this phenomenon

stand out. One explanation is that the market believes that the company is heading towards insolvency.

The other explanation is that the market believes that the asset side of the balance sheet is inflated (or

similarly, the liability side of the BS is understated). Hence, these are the two risks associated with an

investment in DCI: the first risk is that DCI could end up burning through cash and running up against

liquidity concerns; the second risk is that DCI’s assets are worth significantly less than their carrying

values.

I have attempted to vigorously dispel the liquidity concerns and believe that the math works out in a

fairly straightforward manner. The cash position is not as robust as I would like it to be, but even in a

worst case scenario, the only claims on holding company are the Playa Grande convertibles (debt to

gross assets is only c. 15%). Additionally, the company has a cadre of deep pocketed shareholders who

would be willing to make additional equity contributions if circumstances took a turn for the worst. With

the final slice of the recent rights issue more than 4x oversubscribed by existing shareholders, this thesis

appears valid.

In terms of the carrying value of its assets, DCI has made material divestments at NAV (or at a premium

to NAV), but it has failed to ink a big deal. Each of DCI’s advanced projects are now fully funded at the

Phase 1 level, and if DCI can make an early exit from any one of these projects (at NAV), the share price

should respond meaningfully. It is certainly difficulty to value DCI’s assets (given that transaction levels

are incredibly depressed, Colliers is faced with a difficult task) but continued commitments from well‐

regarded branded partners should offer some solace to shareholders. It is implausible to believe that

Ritz Carlton would engage in meaningful commerce with DCI, if it did not believe DCI’s assets to be high

quality. Finally, land purchases made by the founders over the years were done in an opportunistic

manner and should provide downside protection to valuations. Even considering the dramatic decline in

real estate prices since the bulk of the land purchases were made, the acquisition of value‐added

permits in the interim should have a substantial offsetting effect.

Conclusion/catalysts:

In conclusion, DCI offers a very compelling risk/reward scenario. Under the most conservative

assumptions, DCI’s asset portfolio is severely mispriced. The presence of marquee hedge funds, such as

Third Point, lends credence to this conclusion. It is unlikely that Third Point, which manages $9 billion,

would waste its time with a micro cap stock such as DCI if it did not expect to make many multiples of its

initial investment. When the market is fearful, it is time to buy, and DCI presents such an opportunity.

The biggest material catalysts will be announced divestments (either partial or full) at NAV or premiums

to NAV. If the company can validate the independent valuations of its portfolio by divestments, or better

yet by bringing projects from the beginning to the end, the potential share price appreciation will be

substantially more than my estimated upside of 366%.

VALUATION APPENDIX:

1) PORTO HELI

A) AMANZOE

1) Aman Hotel & Spa

Assumptions: Keys = 38Initial room rate (€ per night) = 875Max room rate (€ per night) = 1,235First year occupancy = 35%Second year occupancy = 45%Max occupancy = 65%

2013 2014 2015 2016 2017Total rooms 38 38 38 38 38Room rate € 875 € 963 € 1,059 € 1,165 € 1,235 growth 10% 10% 10% 6%Occupancy 35% 45% 53% 60% 65%Revenue € 4,247,688 € 6,007,444 € 7,709,553 € 9,692,009 € 11,134,143Opex € 4,247,688 € 5,461,313 € 6,371,531 € 7,281,750 € 7,888,563 growth 28.6% 16.7% 14.3% 8.3%NOI € 0 € 546,131 € 1,338,022 € 2,410,259 € 3,245,580 NOI margin 0.0% 9.1% 17.4% 24.9% 29.1%

Valuation (at 8x normalized NOI) = € 25,964,640Implied price per room = € 683,280

Valuation (at 8x normalized NOI) w/ 10% discount for brand usage = € 23,368,176

2) Aman Beach Club

Land area (m2) Price/m2 Estimated value30,000 € 20 € 600,000

3) Aman Villas (Hilltop & Seafront)

Assumptions: Total units = 36

Villa size = 300m2 - 1,500m2

Est. total size = 21,000m2

ASP = €10,000/m2

ASP/Villa = €6 million

Average constuction cost = €2,500/m2

Branding fee = 10% of sales revenuesAgency fee = 3% of sales revenuesLots sold/year = 6

2013 2014 2015 2016 2017 2018Lots sold = 6 6 6 6 6 6Total sold = 6 12 18 24 30 36

m2 sold = 3500 3500 3500 3500 3500 3500

Total m2 sold = 3500 7000 10500 14000 17500 21000

ASP/m2 = € 10,000 € 10,000 € 10,000 € 10,000 € 10,000 € 10,000Revenue = € 35,000,000 € 35,000,000 € 35,000,000 € 35,000,000 € 35,000,000 € 35,000,000

CC/m2 = € 2,500 € 2,500 € 2,500 € 2,500 € 2,500 € 2,500Branding fee (10% of revs) = € 3,500,000 € 3,500,000 € 3,500,000 € 3,500,000 € 3,500,000 € 3,500,000Agency fee (3% of revs) = € 1,050,000 € 1,050,000 € 1,050,000 € 1,050,000 € 1,050,000 € 1,050,000Construction costs = € 8,750,000 € 8,750,000 € 8,750,000 € 8,750,000 € 8,750,000 € 8,750,000Taxes (at 25%) = € 5,425,000 € 5,425,000 € 5,425,000 € 5,425,000 € 5,425,000 € 5,425,000FCF = € 16,275,000 € 16,275,000 € 16,275,000 € 16,275,000 € 16,275,000 € 16,275,000

NPV (discounted at 10%) = € 70,881,868

4) Remaining Land Bank (at Amanzoe)

Land area (m2) Price/m2 Estimated value454,190 € 20 € 9,083,800

5) Amanzoe EV

Estimated EVAman Villas € 70,881,868Aman Hotel & Spa € 23,368,176Land Bank € 9,083,800Aman Beach Club € 600,000Total EV = € 103,933,844

B) THE NIKKI AT PORTO HELI

1) Up-front sale of 75% stake to Swiss Development Group

Transaction EV (for 75% stake) = € 6,900,000

2) Nikki Beach Hotel

Room count Estimated price/room

Estimated value (w/ 10% discount for time value of money)

23 € 500,000 € 11,500,000

3) Nikki Beach Apartments

Assumptions: Total units = 43

Apartment size = c. 81 m2

Est. total size = 3,481 m2

ASP = €10,000/m2

ASP/apt. = €740k

Average constuction cost = €2,500/m2

Branding fee = 10% of sales revenuesAgency fee = 3% of sales revenuesUnits sold per year c. 7

2013 2014 2015 2016 2017 2018 2019Apartments sold = 0 7 7 7 7 7 8Total sold = 0 7 14 21 28 35 43

m2 sold = 0 567 567 567 567 567 648

Total m2 sold = 0 567 1133 1700 2267 2833 3481

ASP/m2 = € 0 € 10,000 € 10,000 € 10,000 € 10,000 € 10,000 € 10,000Revenue = € 0 € 5,666,710 € 5,666,710 € 5,666,710 € 5,666,710 € 5,666,710 € 6,476,240

CC/m2 = € 0 € 2,500 € 2,500 € 2,500 € 2,500 € 2,500 € 2,500Branding fee (10% of revs) = € 0 € 566,671 € 566,671 € 566,671 € 566,671 € 566,671 € 647,624Agency fee (3% of revs) = € 0 € 170,001 € 170,001 € 170,001 € 170,001 € 170,001 € 194,287Construction costs = € 0 € 1,416,678 € 1,416,678 € 1,416,678 € 1,416,678 € 1,416,678 € 1,619,060Taxes (at 25%) = € 0 € 878,340 € 878,340 € 878,340 € 878,340 € 878,340 € 1,003,817FCF = € 0 € 2,635,020 € 2,635,020 € 2,635,020 € 2,635,020 € 2,635,020 € 3,011,452

NPV (discounted at 10%) = € 10,626,078

4) Nikki Beach EV

Estimated EVUp-front sale of 75% € 6,900,000Nikki Beach Hotel € 11,500,000Nikki Beach Apartments € 10,626,078Total EV = € 29,026,078

C) SEAFRONT VILLAS

Transaction EV = € 12,000,000

D) CHEDI HOTELS & VILLAS, JACK NICKLAUS SIGNATURE GOLF COURSE AND RESIDENCES

Land area (m2) Price/m2 Estimated value2,460,000 € 20 € 49,200,000

E) PORTO HELI COLLECTION (TOTAL EV)

Phase Ownership stake Phase EV Net EVAmanzoe 86% € 103,933,844 € 89,383,106Nikki 25% € 29,026,078 € 12,431,519Seafront Villa 100% € 12,000,000 € 12,000,000Chedi, Jack Nicklaus 100% € 49,200,000 € 49,200,000

TOTAL EV = € 163,014,625

2) VENUS ROCK

1) Venus Rock Villas

2013 2014 2015 2016 2017 2018ASP € 380,000 € 380,000 € 380,000 € 380,000 € 380,000 € 380,000Units sold 50 100 200 200 225 225Total units sold 50 150 350 550 775 1000Revenue € 19,000,000 € 38,000,000 € 76,000,000 € 76,000,000 € 85,500,000 € 85,500,000Pre-tax and fees margin 45% 45% 45% 45% 45% 45%Pre-tax and fees € 8,550,000 € 17,100,000 € 34,200,000 € 34,200,000 € 38,475,000 € 38,475,000Branding & marketing (10% of sales) € 1,900,000 € 3,800,000 € 7,600,000 € 7,600,000 € 8,550,000 € 8,550,000Taxes (at 10%) € 665,000 € 1,330,000 € 2,660,000 € 2,660,000 € 2,992,500 € 2,992,500Post-tax FCF € 5,985,000 € 11,970,000 € 23,940,000 € 23,940,000 € 26,932,500 € 26,932,500NPV (discounted at 10%) € 81,596,947NPV (*49.8%) € 40,635,280

2) Remaining Land Bank

Total land at Venus rock is 1,000 hectares; assume from the above that 1,000 homes are sold by 2018 and that 2 homes cover roughly1 hectare; therefore, 500 hectares were used up and 500 are remaining.


3) Venus Rock Total EV

Phase Ownership stake Phase EV Net EVVenus Rock Villas 49.8% € 81,596,947 € 40,635,280Other Land 49.8% € 255,000,000 € 126,990,000

TOTAL EV = € 167,625,280

3) PLAYA GRANDE

1) Aman Hotel (30 rooms)

Assumptions: Keys = 30Initial room rate (€ per night) = 656Max room rate (€ per night) = 926First year occupancy = 35%Second year occupancy = 45%Max occupancy = 65%

2013 2014 2015 2016 2017 2018Total rooms 0 30 30 30 30 30Room rate € 0 € 656 € 722 € 794 € 873 € 926 growth 10% 10% 10% 6%Occupancy 0% 35% 45% 53% 60% 65%Revenue € 0 € 2,514,120 € 3,555,684 € 4,606,586 € 5,736,504 € 6,587,418Opex € 0 € 2,514,120 € 3,232,440 € 3,807,096 € 4,309,920 € 4,669,080 growth 28.6% 17.8% 13.2% 8.3%NOI € 0 € 0 € 323,244 € 799,490 € 1,426,584 € 1,918,338 NOI margin 0.0% 9.1% 17.4% 24.9% 29.1%

Valuation (at 8x normalized NOI) = € 15,346,706Implied price per room = € 511,557Valuation (at 8x normalized NOI) w/ 10% discount for brand usage and further 10% discount for time value of money = € 12,788,921

2) Aman Villas (38 total)

Assumptions: 38 units (sold over 6 years)ASP = € 4,500,000

2014 2015 2016 2017 2018 2019ASP € 4,500,000 € 4,500,000 € 4,500,000 € 4,500,000 € 4,500,000 € 4,500,000Units sold 6 6 6 6 6 8Total units sold 6 12 18 24 30 38Revenue € 27,000,000 € 27,000,000 € 27,000,000 € 27,000,000 € 27,000,000 € 36,000,000Pre-tax and fees margin 75% 75% 75% 75% 75% 75%Pre-tax and fees € 20,250,000 € 20,250,000 € 20,250,000 € 20,250,000 € 20,250,000 € 27,000,000Branding fee (10% of sales) € 2,700,000 € 2,700,000 € 2,700,000 € 2,700,000 € 2,700,000 € 3,600,000Agency fee (3% of sales) € 810,000 € 810,000 € 810,000 € 810,000 € 810,000 € 1,080,000Taxes (at 25%) € 4,185,000 € 4,185,000 € 4,185,000 € 4,185,000 € 4,185,000 € 5,580,000Post-tax FCF € 12,555,000 € 12,555,000 € 12,555,000 € 12,555,000 € 12,555,000 € 16,740,000

NPV (discounted at 10%) € 51,856,929

3) Remaining Land Bank

950 acres total (assume 65 for Aman Hotel and Aman Villas); so, 885 left over


4) Playa Grande Total EV

Phase Ownership stake Phase EV Net EVAman Hotel 99% € 12,788,921 € 12,661,032Aman Villas 99% € 51,856,929 € 51,338,359Rest of Land 99% € 371,700,000 € 367,983,000

TOTAL EV = € 431,982,392

4) PEARL ISLAND

1) Exit from Founder's Phase (7% of Island Size)

Transaction EV = € 10,600,000

2) Rest of Island


3) Pearl Island Total EV

Phase Ownership stake Phase EV Net EVExit from Founder's Phase 100% € 10,600,000 € 10,600,000Rest of Island 60% € 107,136,000 € 64,281,600

TOTAL EV = € 74,881,600

5) OTHER MAJOR PROJECTS (AND ARISTO)

Project Country Ownership stake Total area (m2) Net area (m2) Estimated price/m2 Net EV1) Sitia Bay Golf Resort Greece 78.0% 2,800,000 2,184,000 € 20 € 43,680,0002) Kea Resort Greece 67.0% 650,000 435,500 € 20 € 8,710,0003) Scropio Bay Resort Greece 100.0% 1,720,000 1,720,000 € 20 € 34,400,0004) Lavender Bay Resort Greece 100.0% 3,100,000 3,100,000 € 20 € 62,000,0005) Plaka Bay Resort Greece 60.0% 4,400,000 2,640,000 € 20 € 52,800,0006) Triopetra Greece 100.0% 110,000 110,000 € 20 € 2,200,0007) Eagle Pine Golf Resort Cyprus 49.8% 3,190,000 1,588,620 € 51 € 81,019,6208) Apollo Heights Polo Resort Cyprus 100.0% 4,610,000 4,610,000 € 51 € 235,110,0009) Livka Bay Resort Croatia 100.0% 630,000 630,000 € 24 € 15,120,00010) Mediterra Resorts Turkey 100.0% 120,000 120,000 € 48 € 5,760,00011) Aristo Hellas Cyprus 100.0% 270,000 270,000 € 51 € 13,770,00012) Rest of Aristo Cyprus 49.8% 3,920,000 1,952,160 € 51 € 99,560,160

TOTAL EV = € 654,129,780

6) CONSOLIDATED VALUATION

Group Valuation

Porto Heli € 163,014,625Venus Rock € 167,625,280Playa Grande € 431,982,392Pearl Island € 74,881,600Total Advanced Projects € 837,503,896

Major Projects (and Aristo) € 654,129,780

Total EV € 1,491,633,676Total Debt € 140,053,000Total Cash € 60,872,000Estimated Management Incentive Fee € 177,490,535Calculated NAV = € 1,234,962,141NAV (w/ 20% liquidity discount) = € 987,969,713

Fully Diluted Shares = 642,440,000Calculated NAV/Share = € 1.54Current Price/Share = € 0.33Upside = 366%

LAND TRANSACTION APPPENDIX:

Turkey

Location Size (m2) Price Price/m2

Alanya 225,000 € 33,500,000 € 149Alanya 33,000 € 8,000,000 € 242Alanya 10,000 € 5,000,000 € 500Alanya 720 € 78,000 € 108Alanya 6,132 € 450,000 € 73Antalya 4,500 € 5,000,000 € 1,111Antalya 332 € 90,000 € 271Antalya 9,500 € 65,000 € 7Antalya 1,050 € 290,000 € 276Antalya 260 € 18,000 € 69Belek 5,700 € 3,000,000 € 526Belek 31,000 € 3,850,000 € 124Belek 15,000 € 675,000 € 45Belek 2,650 € 250,000 € 94Belek 470 € 35,000 € 74Fethiye 1,280 € 1,200,000 € 938Fethiye 750 € 170,000 € 227Fethiye 2,400 € 330,000 € 138Fethiye 420 € 60,000 € 143Fethiye 610 € 58,500 € 96Kalkan 4,750 € 110,000 € 23Kalkan 350 € 19,000 € 54Kalkan 180,000 € 1,600,000 € 9Kalkan 9,600 € 75,000 € 8Kalkan 1,230 € 200,000 € 163Kas 10,000 € 80,000 € 8Kas 2,000 € 69,000 € 35Kas 19,300 € 925,000 € 48Kas 19,000 € 1,050,000 € 55Kas 10,000 € 150,000 € 15Kemer 5,015 € 200,000 € 40Kemer 4,000 € 800,000 € 200Kemer 33,000 € 4,000,000 € 121Kemer 9,000 € 3,000,000 € 333Kemer 2,100 € 375,000 € 179Side 650 € 38,000 € 58Side 415 € 68,000 € 164Side 5,500 € 50,000 € 9Side 1,700 € 1,350,000 € 794Side 430 € 40,000 € 93

Average = € 191Average (*25%) = € 48

dolphin capital investors (dci ln) investment thesis

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