By Boyd Erman
David Einhorn should have stuck around at MI Developments (MIM).
The activist hedge fund manager sold his stake in MI in the second quarter after a long battle with MI founder Frank Stronach. MI was founded to own the factories that Magna International used to make auto parts, but Mr. Stronach had loaded it down with other assets like horse tracks that most investors hated. However, Mr. Stronach controlled the company.
That changed when Mr. Stronach agreed to give up control, and to take the race track and gaming assets. The stock popped, and not long after, Mr. Einhorn bailed. Sure, he got some of his money back, but had he waited, there was more in store.
There may well be a lot more gains in shares of MI -- at least that's what a lot of Canadian institutions are now betting.
Mr. Einhorn sold all his stock by the end of the second quarter, just before the installation of new management with a plan to juice returns.
At the same time as the U.S. hedge fund holders, led by Mr. Einhorn, pared their holdings, a host of Canadian investors bought in just in time for a change in corporate structure that has the potential to drive significant gains.
Among the Canadian firms that hold MI are Great West Life Assurance, Waratah Advisors, Gluskin Sheff, AGF, Canada Pension Plan Investment Board and CI Investments. Many added significantly to their stakes in the second quarter, including CI, AGF, and CPPIB.
The average closing price for MI shares in the second quarter was about $28.80 a share, according to figures from Bloomberg. Wednesday, the stock was approaching $32. Add that to a dividend that just jumped fivefold to $2 a year from 40 cents and the returns are looking juicy already.
What did the buyers see? A company with a balance sheet full of real estate assets that were undervalued by the market and that could support much more debt, driving up equity returns, once cash-sucking racetrack operations were gone as part of the deal with Mr. Stronach. Similarly, the company paid out very little of the funds it generated, relative to other real estate firms. Jack that up, and the stock would follow.
And there was a new chief executive officer, William Lenehan, lined up with a plan to make it happen. That's just what he did when MI announced the results of its strategic review Tuesday night.
Optimists who follow the company expect the shares could head toward $40 as the balance sheet is levered up under the restructuring plan, and as investors revalue the company's real estate more in line with the broader market levels. (One estimate is that MI's real estate was valued at a 10 per cent cap rate when it should be more like 8 per cent, implying a 20 per cent icrease in value.)
Similarly, at $2 a share, MI Developments now sports a dividend yield of 6.25 per cent. The yield on the iShares S&P/TSX Capped REIT Index fund is about 5.1 per cent. That also implies a significant move up in the stock price to bring the yield more in line with other REITs as investors get comfortable with the new MI.